The CFO of Cicero Industries Plans to Calculate a New

question 32

Multiple Choice

The CFO of Cicero Industries plans to calculate a new 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:

Impossibility

A defense in contract law where a party claims that fulfilling the contractual obligations has become objectively impossible due to unforeseen events.

Contractual Obligations

Responsibilities that parties are legally bound to perform as outlined in a contract agreement.

UCC

Uniform Commercial Code, a standardized set of laws and regulations intended to facilitate the smooth transaction of commerce among American states.

Uniform Commercial Code

A comprehensive set of laws governing commercial transactions in the United States.