Which of the following factors should be included in the cash flows used to estimate a project's NPV?
A) All costs associated with the project that have been incurred prior to the time the analysis is being conducted.
B) Interest on funds borrowed to help finance the project.
C) The end-of-project recoof any working capital required to operate the project.
D) Cannibalization effects, but only if those effects increase the project's projected cash flows.
E) Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.

Question

Quizplus · Accepted Answer

The cash flows used to estimate a project's NPV should include the end-of-project recovery of any working capital required to operate the project. This reflects the fact that the investment in working capital is essentially a loan to the project that must be repaid at the end of its useful life. Option A is incorrect because sunk costs (costs that have already been incurred) should not be included in a project analysis. Option B is incorrect because interest expenses are accounted for separately in calculating the cost of capital. Option D is incorrect because cannibalization effects should be included regardless of whether they increase or decrease cash flows. Option E is incorrect because the expenditures on research and development should be considered as a separate investment decision and should not be included in the project's cash flows.

Which of the Following Factors Should Be Included in the Cash