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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

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

The market research fee already paid is excluded because it is a sunk cost that does not change with the accept or reject decision. Working capital needs, opportunity cost of using an idle asset and lost contribution from cannibalised products are incremental and must be included.

  1. AAdditional working capital needed because of the project
  2. BMarket research fee of Rs 2 lakh already paid last year before deciding to evaluate the projectCorrect
  3. COpportunity cost of an idle plant that the project will use
  4. DLoss of contribution on an existing product that the new project will cannibalise

Explanation

Only incremental, future cash flows matter. The market research fee is already paid and cannot be recovered whatever the decision, so it is a sunk cost. Working capital, opportunity cost and cannibalisation all change because of the project and must be included.

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