We are considering offering a new product, and need to determine the cash flows

Question

We are considering offering a new product, and need to determine the cash flows of this "project." For each of the following items, indicate whether we need to consider the item in determining the cash flows of the project:

a. The new product will reduce demand for an existing product we offer.
b. We will use spare equipment in the project.
c. The new product will stimulate more demand for an existing product that we offer.
d. We have conducted one feasibility study, but haven't paid for it yet.

Explanation / Answer

a) The impact of new product on sale of existing product shall be considered to real picture. b) Spare equipment can be rented or used in some other way if useful.So, its opportunity cost may be considered in cash flows. c) This does not seem to be correct. d) Cost of feasiblity report will be a sunk cost whether project is acceptd or rejected, Hence its cost shall not be considered in cash flows.

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