Chapter 6, Problem 2CQ

a.

Summary Introduction

To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, the item is reduction in company sales due to investment.

Incremental Cash Flow:

The addition to the current cash flow of the company based on the acceptance of the new project or expansion plan is called additional cash flow. It is used to evaluate the financial viability of different alternatives.

Opportunity Cost:

Opportunity cost means the cost of missed opportunity. It refers to the advantage that a company could have gained, but gave up, to take an alternative action.

b.

Summary Introduction

To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, the item is expenses on equipment and plants are not made and would be made on acceptance of project.

c.

Summary Introduction

To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, the item is research cost in relation to product in the last 3 years.

Sunk Cost:

Sunk cost means that cost that has been incurred in the past and has no effect on the future project. It is that cost that is related to past events that cannot be recovered and is irrelevant for the new projects of a company.

d.

Summary Introduction

To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, the item is annual expense of depreciation on investment.

e.

Summary Introduction

To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, the item is dividend payments.

f.

Summary Introduction

To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, items are plant and equipment resale value end of project life.

g.

Summary Introduction

To identify: The items that should be treated as incremental cash flow when computing the net present value (NPV) of an investment. Here, items are medical costs and salary given to production personnel.