For the case of an electric car project, the following costs should be treated a
ID: 2821107 • Letter: F
Question
For the case of an electric car project, the following costs should be treated as incremental costs in the NPV analysis, EXCEPT:
a.
Interest payments on debt incurred to finance the project
b.
The value of machinery that will be transferred to the project from discontinued gasoline model production instead of being sold
c.
The expenditure on new plant and equipment
d.
The consequent reduction in sales of the company's existing gasoline models
a.
Interest payments on debt incurred to finance the project
b.
The value of machinery that will be transferred to the project from discontinued gasoline model production instead of being sold
c.
The expenditure on new plant and equipment
d.
The consequent reduction in sales of the company's existing gasoline models
Explanation / Answer
While calculating NPV, required rate of return is used. It is used based on source of cash flows used and riskiness of the cash flow from the project. Interest is not an operating cash flow. It is not considered incremental cost while evaluating project.
Hence, correct option is (a) Interest payments on debt incurred to finance the project.