Hill Top Lumber Company is considering building a sawmill in the state of Washin

Question

Hill Top Lumber Company is considering building a sawmill in the state of Washington because the company doesn't have such a facility to service its growing customer base that is located on the west coast. Hill Top's executives believe that future growth in west coast customers will make the sawmill project a good investment. When evaluating the acceptability of the project, which of the following would be considered a relevant cash flow that should be included when determining its initial investment outlay?

A Hill Top spent $150,000 to prepare the feasibility report of the project B The annual cash inflow of $2 million from another existing project that will continue unaffected by the new project C The cost of an existing debt of the firm that will annually increase by 0.3 percent as per the lending terms of the debt D The cost of $3 million incurred to clear the land on which Hill Top wants to build the sawmill E It is estimated that $20 million of business from exisiting customers will move to the new sawmill

Explanation / Answer

In project evaluation, all the relevant cash flows must be considered. Cash flows increase or decrease as a result of project are called relavant cash flows. Here, $3 million was as a result if saw mill so should be considered for initial investment.

Hence, correct option is "(D) The cost of $3 million incurred to clear the land on which Hill Top wants to build the sawmill."

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.