When evaluating the cash flows associated with a capital budgeting project, shipping and installation costs associated with the purchase of an asset, such as a lathe, are considered part of the:
A) initial investment outlay because these expenses are effectively part of the asset's purchase price.
B) incremental operating cash flows because shipping and installation costs represent expenses that have to be written off over the life of the asset.
C) terminal cash flows, because these expenses aren't paid until the end of the asset's life.
D) sunk costs because these expenses do not affect any current or future cash flows associated with investing in the asset.
E) opportunity cost of the project because these costs are increasing the potential of the project.

Question

Quizplus · Accepted Answer

Shipping and installation costs are considered part of the initial investment outlay because these expenses are effectively part of the asset's purchase price. They are essential for acquiring the asset, and without them, the asset cannot be put into service. Therefore, they are considered part of the initial cost of the investment and will affect the project's cash flows.

When Evaluating the Cash Flows Associated with a Capital Budgeting