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Start with the displaced activity
A fictional new product displaces old-product revenue of 100. If the avoided variable cash costs are 60, the pretax contribution effect is a loss of 40, not automatically 100. Additional changes to fixed costs or working capital may also matter.
Calculate the net operating effect
| Change | Cash-flow effect |
|---|---|
| Lost old-product receipts | −100 |
| Avoided variable cash costs | +60 |
| Net pretax contribution change | −40 |
State the tax assumption separately
If the simplified example assumes an immediate 25% marginal tax effect on that contribution, the after-tax loss is 40 × 0.75 = 30. Actual tax treatment and timing are not established by the arithmetic alone.
Compare against the actual baseline
If the old-product activity would decline even without the proposal, not every lost sale is caused by the proposal. Define the alternative forecast first. Incrementality is about differences between branches, not whether a cash flow is attached to a new product name.