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 (i.e. ,the initial investment cost,the annual operating cash flows,and the terminal cash flows) ,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 additional investment in net operating 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.

---

Definitions:

Cost Basis

The original value of an asset for tax purposes, usually the purchase price, which is used to calculate capital gains or losses when the asset is sold.

Subsidiaries

Companies that are controlled by another company, known as the parent company, through ownership of more than half of the voting stock or through other mechanisms of control.

Net Assets

The total assets of a company minus its total liabilities, representing the owners' equity in the company.

Business Combination

Represents a transaction or event where an acquirer obtains control of one or more businesses.