0.25 QUESTION 1 Which of the following should be considered when a company estim

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0.25 QUESTION 1 Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project? o a The firm would borrow all the money used to finance the new project, and the interest on this debt would be S1.5 million per year b. The company has spent and expensed S1 million on research and development costs associated with the new project. @ c. The new project is expected to reduce sales of one of the company's existing products by 5%. o d. 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. e. The company spent and expensed S10 million on a marketing study before its current analysis regarding whether to accept or reject the project QUESTION 2 Which of the following statements is CORRECT? o a. A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm's existing stores. b. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. c. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project. d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to ick Save and Submit to save and submit. Click Save All Answers to save all answers. Save All Answers

Explanation / Answer

question 1: Answer is option c. The new project is expected to reduce sales of one of the company's existing products by 5%. This is referred to as cannibilization. Cannibilization affects the company's cash flows and hence should be considered. Rest of the factors in other options are not important.

question 2: Answer is option b. Sunk costs cannot be recovered. Option a. gives the definition of cannibilization.

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