Question

question 14 (5 points)
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a company is considering a new project. the cfo plans to calculate the project’s npv by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flows), then discounting those cash flows at the company’s overall wacc. which one of the following factors should the cfo be sure to include in the cash flows when estimating the relevant cash flows?
all sunk costs that have been incurred relating to the project.
all interest expenses on debt used to help finance the project.
the additional investment in net operating working capital (nowc) required to operate the project, even if that investment will be recovered at the end of the project’s life.
sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
effects of the project on other divisions of the firm, but only if those effects lower the project’s own direct cash flows.

Explanation:

1. Sunk costs are irrelevant for capital budgeting (NPV) as they are already incurred and can't be changed, so options with sunk costs are wrong.
2. Interest expenses are incorporated in the WACC (discount rate), not in cash flows, so the interest expense option is wrong.
3. Net operating working capital (NOWC) investment is a relevant cash flow (outflow initially, inflow at termination), so it should be included.
4. Effects on other divisions should be included regardless of direction (positive or negative), and the option's "only if lower" is incorrect.

Answer:

The additional investment in net operating working capital (NOWC) required to operate the project, even if that investment will be recovered at the end of the project’s life.