Question

A company is considering a new project. The Chief Financial Officer (CFO) plans to calculate the project's NPV. Which of the following factors should the CFO include in the cashflows when estimating the relevant cash flows?

	a.	Effects of the project on other divisions of the firm, but only if those effects lower the project's own direct cash flows.
	b.	All sunk costs that have been incurred relating to the project.
	c.	All interest expenses on debt used to help finance the project.
	d.	Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
	e.	The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project's life.

Answer 1

Answer: Option e is correct.

The chief financial officer should include the investment in working capital required to operate the project. This is an important part (when it comes to operating a project) because in the absence (or too low) of working capital there is a possibility that the company might stop the project in between, this could lead to huge losses.