Aa Aaa E. 1. Identifying relevant cash flows Hunter Industries is evaluating a c

Question

Aa Aaa E. 1. Identifying relevant cash flows Hunter Industries is evaluating a capital budgeting project and has come across a few issues that require special attention. Classify each item as a sunk cost, externality, opportunity cost, or a change in net operating working capital (NOWC). Then, in the last column indicate whether the item should be included in the project's analysis or not Sunk Cost opportunity Externality Change Include in Cost in NOWC the Analysis? The new project is expected to reduce sales revenue for one of the company's other product lines. The project will use some equipment that the firm owns but isn't using currently. However, a used equipment dealer has offered to buy the equipment. Hunter spent nearly $1.1 million in market research to develop new product ideas. Many of the new sales from this project O will be made on credit, causing accounts receivable to increase. The factory that the project will use could be used for another project that is expected to have a slightly positive net present value (NPV). Suppose Hunter will be issuing debt to support this project and other capital budgeting projects this year. The firm's interest expense will increase by $700,000. Should the change in interest expense be included in the analysis? O No O Yes

Explanation / Answer

1. Identifying relevant cash flows:

The new project is expected to reduce sales revenue for one of the company's other product lines- Include in the analysis.

The project will use some equipment that the firm owns but ------------Opportunity cost (Alternative use)

Hunter spent mearly $1.1 million in market research ------------Sunk cost ( Already incurred and not relevant)

Many of the new sales from this project ----------------------------Change in NOWX (Account receivable being current assets)

The factory that the project use --------------------------------------Opportunity cost (Alternative use)

Yes, the interest expense should be included in the analysis.

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