Dalrymple Inc.is considering production of a new product.In evaluating whether to go ahead with the project,which of the following items should NOT be explicitly considered when cash flows are estimated?
A) The company will produce the new product in a vacant building that was used to produce another product until last year.The building could be sold,leased to another company,or used in the future to produce another of the firm's products.
B) The project will utilize some equipment the company currently owns but is not now using.A used equipment dealer has offered to buy the equipment.
C) The company has spent and expensed for tax purposes $3 million on research related to the new product.These funds cannot be recovered,but the research may benefit other projects that might be proposed in the future.
D) The new product will cut into sales of some of the firm's other products.
E) If the project is accepted,the company must invest an additional $2 million in net operating working capital (NOWC).However,all these funds will be recovered at the end of the project's life.

Question

Quizplus · Accepted Answer

The $3 million spent and expensed for tax purposes on research related to the new product is a sunk cost, which means it has already been incurred and cannot be recovered or changed by the decision to go ahead with the new project. Therefore, it should not be considered in the cash flow estimation for the new project.