Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should be considered when cash flows are estimated? If the item should not be included, explain why not.
Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead
with the project, which of the following items should be considered when cash flows are
estimated? If the item should not be included, explain why not.
A) Since the firm's director of capital budgeting spent some of her time last year to evaluate the
new project, a portion of her salary for that year should be charged to the project's initial cost.
B) The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.
C) The company has spent for tax purposes $3 million on research related to the new product.
These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.
D) The new product will cut into sales of some of the firm's other products.
E) The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year.
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