A Company Is Considering a New Project

question 37

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 (the initial investment cost, the annual operating cash flows, and the terminal cash flow) , then discounting those cash flows at the company's WACC. Which one of the following factors should the CFO include in the cash flows when estimating the relevant cash flows?

• A) all interest expenses on debt used to help finance the project
• B) 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
• C) sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year
• D) effects of the project on other divisions of the firm, but only if those effects lower the direct cash flows of the project

---

Definitions:

Tariffs and Quotas

Government-imposed regulations where tariffs are taxes on imported goods, and quotas are limits on the amount of a product that can be imported.

Smoot-Hawley Tariff Act

Legislation passed in 1930 that established very high tariffs. Its objective was to reduce imports and stimulate the domestic economy, but it resulted only in retaliatory tariffs by other nations.

Global Trade War

A situation where countries impose tariffs or other trade barriers on each other in response to trade disputes, leading to reduced international trade.

Great Depression

A severe worldwide economic downturn that took place during the 1930s, leading to high unemployment and significant economic distress.