Asked by Jalon Williams on Jun 03, 2024
Verified
Which of the following does NOT have incremental cash flow effects and thus should NOT be considered in capital budgeting decisions?
A) A new product will generate new sales, but some of those new sales will be from customers who switch from one of the firm's current products.
B) A firm must obtain new equipment for the project, and $1 million of costs for shipping and installing the new machinery will be required.
C) A firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered if the new project is rejected.
D) A firm can produce a new product, and the existence of that product will stimulate sales of some of the firm's other products.
Incremental Cash Flow
The additional cash flow generated by a company as a result of engaging in a specific project or activity.
Cannibalization
The loss of sales of an existing product due to the introduction of a new product by the same company.
Sunk Costs
Expenditures that have been made and cannot be recovered, and should not influence ongoing investment decisions.
- Acquire knowledge on the topic of incremental cash flows, along with modifications in working capital and cannibalization consequences.
- Gain insight into the influence of sunk costs and the reasons for their non-inclusion in financial planning assessments.
Verified Answer
MR
Maggie ReevesJun 07, 2024
Final Answer :
C
Explanation :
Sunk costs, such as the $2 million spent on R&D, are costs that have already been incurred and cannot be recovered. Therefore, they should not be considered in future capital budgeting decisions.
Learning Objectives
- Acquire knowledge on the topic of incremental cash flows, along with modifications in working capital and cannibalization consequences.
- Gain insight into the influence of sunk costs and the reasons for their non-inclusion in financial planning assessments.
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