A company is considering a new project. The CFO plans to calculate the project\'

Question

A company is considering a new project. The CFO plans to calculate the 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 flows), 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 additional investment in net operating working capital required to operate the project, even if that investment will be recovered at the end of the project's life. d. Effects of the project on other divisions of the firm, but only if those effects lower the project's own direct cash flows. e. Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.

Explanation / Answer

.C.. The additional investment in net operating working capital required to operate the project, even if that investment will be recovered at the end of the project's life.

It is important to include the additional investment made in net working capital, since it involves some cash outflow.

The recovery of investment at the end of project's life will be considered as a cash inflow.

Sunk costs are not relevant cash flows.

effects on other project cash flows are to be considered without any exception.

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