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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

While estimating incremental cash flows for a new project, which of the following should be EXCLUDED from the analysis?

The market research fee already paid is excluded because it is a sunk cost. It cannot be recovered or altered by accepting or rejecting the project. Working capital, lost contribution on displaced products and opportunity cost of an owned asset are all incremental effects and must be included.

  1. AMarket research fee of Rs 2 lakh already paid last year before deciding to evaluate the projectCorrect
  2. BAdditional working capital needed at the start of the project
  3. CLoss of contribution on an existing product that the new product will displace
  4. DOpportunity cost of a vacant factory shed that could otherwise be rented out

Explanation

A fee already paid is a sunk cost; it will not change whatever decision is taken, so it is not an incremental cash flow. Working capital, cannibalised contribution and opportunity cost all change because of the project and must be included.

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