The CFO of Cicero Industries Plans to Calculate a New

question 10

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:

Fixed Expenses

Fixed expenses are consistent costs that do not vary with the volume of business activity, such as rent or salaries.

Net Income

The total earnings of a company after all expenses and taxes have been deducted from revenues, indicating the company's profit.

Selling Price

The amount of money charged to the customer for a product or service.

Variable Manufacturing Costs

These are costs that vary directly with the level of production output, including expenses like raw materials and variable labor costs.