Asked by Bryson Winder on Jul 02, 2024
Verified
Which factor is NOT relevant when determining incremental cash flows for a new product?
A) the land that would be used for the new project and could be sold to another firm
B) revenues from an existing product that would be lost as a result of customers switching to the new product
C) shipping and installation costs associated with preparing a machine that would be used to produce the new product
D) the cost of a marketing study that was completed last year related to the new product (This research led to the tentative decision to go ahead with the new product, and the cost of the research was expensed for tax purposes last year.)
Incremental Cash Flows
The additional cash flows from operations that a business generates from taking on a new project.
Marketing Study
An analysis or research conducted to gain insights into and understand potential market trends, consumer behaviors, or the effectiveness of marketing strategies.
Shipping Costs
Expenses associated with the transportation of goods from one location to another.
- Comprehend the effects of sunk costs and the rationale behind their exclusion from capital budgeting evaluations.
Verified Answer
PA
Prabhan Abesekara7 days ago
Final Answer :
D
Explanation :
The cost of a marketing study completed last year is a sunk cost and is not relevant when determining incremental cash flows for a new product. Incremental cash flows are concerned with future cash flows that are expected to change as a result of the project, and the cost of the study is a past cost that has already been incurred and expensed. The other choices are relevant factors that should be considered when determining incremental cash flows.
Learning Objectives
- Comprehend the effects of sunk costs and the rationale behind their exclusion from capital budgeting evaluations.