Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
A) The new project is expected to reduce sales of one of the company's existing products by 5%.
B) Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost.
C) The company has spent and expensed $1 million on R&D associated with the new project.
D) The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year.

Question

Quizplus · Accepted Answer

When estimating cash flows for a proposed project, only those factors directly related to the future cash inflows and outflows of the project should be considered. Option A represents a factor that would directly impact the cash inflows of the project, as it reduces the sales of an existing product. Options B, C, and D all represent sunk costs, which are costs that have already been incurred and cannot be recovered. Sunk costs should be ignored when estimating cash flows for a project.

Which of the Following Should Be Considered When a Company