A Company Is Considering a New Project

question 11

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.

---

Definitions:

Recovery Drive

A drive that contains all the information needed to reinstall your operating system if it should become corrupted. Often the manufacturer will have placed a utility on your system to create this.

Utility

Software designed to help analyze, configure, optimize or maintain a computer system.

Computer Crashes

Instances where a computer or a software abruptly stops functioning due to errors, overloading, or hardware failure.

Subscription Software

A model whereby the user pays a fee to use the software. The software is downloaded and installed locally but is routinely updated by connection to the manufacturer’s server.