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.

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Definitions:

Stable Environment

An environment where conditions remain relatively constant over time, allowing for the maintenance of ecosystem equilibrium.

Epithelial Tissues

Layers of cells that cover the body's surfaces, line cavities, and form glands, playing key roles in protection, secretion, and absorption.

Sweating

The process of secreting fluid from the body's sweat glands, primarily for cooling the body through evaporation.

Panting

Rapid shallow breathing through the mouth, often used as a means of reducing body temperature by animals, including humans.