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 cost of the project, $2 million, if invested in existing projects could have provided a return of $3.5milion
C) The expected inflation during the project's life is 3%.
D) It will cost $3 million to clear the land on which Hill Top wants to build the sawmill.
E) It is estimated that $20 million of business from existing customers will move to the new sawmill.

Question

Quizplus · Accepted Answer

The cost of clearing the land on which the sawmill will be built is a relevant cash flow because it is an initial investment outlay that is necessary for the project. Choices A, B, C, and E are not relevant cash flows for determining the project's initial investment outlay. Choice A is a sunk cost that has already been incurred and is not relevant to the decision. Choice B is an opportunity cost that is not relevant to the decision. Choice C is a future inflation rate that is not relevant to the initial investment outlay. Choice E is a future cash flow, but it is not relevant to the initial investment outlay.

Hill Top Lumber Company Is Considering Building a Sawmill in the State