When evaluating the cash flows associated with a capital budgeting project, shipping and installation costs associated with the purchase of an asset, such as a lathe, are considered part of the
A)initial investment outlay because these expenses effectively are part of the asset's purchase price.
B)incremental operating cash flows because shipping and installation costs represent expenses that have to be written off over the life of the asset.
C)terminal cash flows, because these expenses aren't paid until the end of the asset's life.
D)sunk costs because these expenses do not affect any current or future cash flows associated with investing in the asset.
E)None of the above is a correct answer.

Question

Quizplus · Accepted Answer

Shipping and installation costs associated with the purchase of an asset are considered part of the initial investment outlay because these expenses effectively increase the asset's purchase price. The initial investment outlay represents the total cost of acquiring an asset, which includes not only the cost of the asset, but also any additional expenses such as shipping and installation costs. These expenses are not considered sunk costs because they are directly related to the acquisition of the asset and affect the initial cash flow of the project.

When Evaluating the Cash Flows Associated with a Capital Budgeting