Incremental cash flow refers to the additional cash generated by a project or investment compared to doing nothing. It is calculated as the cash inflows from the project less the cash outflows. Incremental cash flows are important for capital budgeting decisions because they indicate whether a project will generate positive or negative returns. Only projects with positive incremental cash flows should be accepted.
For the Palm's Hospital project, the incremental cash flows would be calculated as:
Cash Inflows:
- Revenue from patients treated at the new facility
Cash Outflows:
- Construction costs for the new facility
- Operating costs of the new facility (staff, supplies, etc.)
- Interest costs on debt financing
The incremental