19. Hill Top Lumber Company is considering building a sawmill in the state of Wa

Question

19. Hill Top Lumber Company is considering building a sawmill in the state of Washington because the company doesn't have such a facility to service its growing customer base that is located on the west coast. Hill Top's executives believe that future growth in west coast customers will make the sawmill project a good investment. When evaluating the acceptability of the project, which of the following would be considered a relevant cash flow that should be included when determining its initial investment outlay? a. Hill Top spent $150,000 to prepare the feasibility report of the project. b. The annual cash inflow of $2 million from another existing project that will continue c. The cost of an existing debt of the firm that will annually increase by 0.3 percent as d. The cost of $3 million incurred to clear the land on which Hill Top wants to build the e. It is estimated that $20 million of business from existing customers will move to the unaffected by the new project. per the lending terms of the debt. sawmill new sawmil

Explanation / Answer

Feasibility report is considered a research expense and hence a sunk cost which will not be part of initial outlay.

Cash inflow is from another project, so it will not be considered in this investment analysis

The cost of debt will be expensed during the life of the project as interest expense and will not be considered as initial investment outlay

$ 20 Million of business from existing customers will start flowing only when the operation of new saw mill begins. Hence it will not be part of initial investment.

The cost of $3 Million incurred to clear the land on which Hill top wants to build saw mill is a relevant cost that must be included in project analysis. Hence

Answer : d)

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.