XYZ,Inc.is considering adding a product line that would utilise floor space in their manufacturing plant that is currently used for storage.XYZ will need to rent new storage space elsewhere.When calculating free cash flows,XYZ management should:
A)Ignore it because it already owns it.
B)Include the cost of the floor space.
C)Add the cost to revenue as a bonus.
D)Calculate the interest expense on the rented space.

Question

Quizplus · Accepted Answer

When calculating free cash flows, XYZ should include the cost of the floor space as an opportunity cost because it is giving up potential revenue by using the space for a new product line. Additionally, since XYZ will need to rent new storage space elsewhere, the cost of the rental space should also be included in the calculation. Ignoring the cost of the floor space or adding it as a bonus to revenue would be incorrect, and calculating the interest expense on the rented space is not necessary for this calculation.

XYZ,IncIs Considering Adding a Product Line That Would Utilise Floor