Company Is Considering a New Project

question 12

Multiple Choice

company is considering a new project.The CFO plans to calculate the project's NPV by estimating the relevant cash flows for each year of the project's life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow) , then discounting those cash flows at the company's overall WACC.Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?

• A)All sunk costs that have been incurred relating to the project.
• B)All interest expenses on debt used to help finance the project.
• C)The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project's life.
• D)Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
• E)Effects of the project on other divisions of the firm, but only if those effects lower the project's own direct cash flows.

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Definitions:

Expectancy Effect

The impact that a person's expectations can have on the outcome of a situation or experiment, often related to the placebo effect.

Misperception

An incorrect understanding or interpretation of information, events, or situations.

Rods

Visual receptors that respond to dim light.

Cones

Visual receptors involved in color vision.