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:

Anisole

An organic compound with the formula CH3OC6H5, consisting of a methoxy group (-OCH3) bonded to a phenyl group, used as a precursor in perfumes and pharmaceuticals.

Structure

The arrangement or organization of atoms within a molecule, determining its shape, properties, and reactivity.

Melting Point

The temperature at which a solid becomes a liquid at atmospheric pressure, indicative of the purity and molecular structure of substances.

Dichlorobenzene

An aromatic compound with the formula \(C_6H_4Cl_2\), existing in three isomeric forms, and used as a solvent, deodorant, and in the manufacture of other chemicals.