- A.A company must stop selling an old medicine because it is toxic, whether or not it launches a new medicine. Is the lost old-product revenue an incremental cost of the new project?
Incremental Cash Flow Principles
A.
No. The loss occurs in both the with-project and without-project scenarios. Only differences caused by undertaking the new investment are incremental. This differs from cannibalisation, where the new product itself causes lost contribution on existing products.
Incremental Cash Flow Principles
- A.Risc-V considers launching new smartphone processors. Should lost EBITDA on the company’s existing processors displaced by the new line enter the project valuation?
A.
Yes. The lost contribution is an incremental opportunity cost caused by the new project. Include the after-tax cash-flow effect. Do not count the full lost sales revenue if some related cash costs are also avoided.