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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Which of the following cash flows should be EXCLUDED when computing the incremental cash flows of a new project at Mehta Foods Ltd?

The Rs 50,000 market survey cost spent last year should be excluded because it is a sunk cost that will not change whether the project is accepted. Working capital, salvage value and opportunity costs are relevant incremental cash flows.

  1. AAdditional working capital required for the project
  2. BRs 50,000 spent last year on a market survey for the projectCorrect
  3. CSalvage value of the plant at the end of the project
  4. DOpportunity cost of using an existing idle building

Explanation

Sunk costs already incurred and not recoverable are irrelevant to the decision, so the past survey cost is excluded. Working capital, salvage value and opportunity cost are all future or incremental effects of accepting the project and are included.

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