HPE0-V27 · Question #46
What is the correct method to calculate incremental cash flow?
The correct answer is D. Substract projected increase in revenue or decrease in costs from the initial investment. Incremental cash flow is the difference between the cash flow of a project with the investment and the cash flow of the same project without the investment. It represents the net change in cash flow that results from making the investment. The correct method to calculate…
Question
What is the correct method to calculate incremental cash flow?
Options
- ASubstract projected decrease in revenue or increase in costs from the initial investment.
- BDivide the increase in revenue by the time needed to offset the IT investment.
- CMultiply the increase in revenue by the time needed to offset the IT investment.
- DSubstract projected increase in revenue or decrease in costs from the initial investment.
How the community answered
(27 responses)- A7% (2)
- B4% (1)
- C4% (1)
- D85% (23)
Explanation
Incremental cash flow is the difference between the cash flow of a project with the investment and the cash flow of the same project without the investment. It represents the net change in cash flow that results from making the investment. The correct method to calculate incremental cash flow is to substract projected increase in revenue or decrease in costs from the initial investment. This method captures the additional cash inflows and outflows that are attributable to the investment, and excludes any cash flows that are unrelated to the investment. Incremental cash flow can help you evaluate the profitability and feasibility of an IT investment by comparing it to the required rate of return or the payback period.
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