A Company Is Considering a New Project

question 6

Multiple Choice

A 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:

Demands

Conditions or requirements placed upon an entity or individual.

Expectations

Beliefs or forecasts about what will happen in the future based on past experience or evidence.

Pressure

The pressure is the amount of force exerted at a right angle to the surface of an object, divided by the area across which the force is spread.

General Adaptation Syndrome

A three-phase response model describing the body's physiological changes to stress: alarm, resistance, and exhaustion.