Question

Evershine Corporation is evaluating a project to manufacture high-tech printers as part of its strategy to increase its product offerings to the market. Which of the following items should be excluded from the cash flow calculations to determine NPV of the project? Multiple Choice

a)Decrease in sales of current printers when the new printers are introduced
b)Increase in accounts recelvable needed to finance sales of the new printers
c)Interest on a loan which wa taken to finance the new project
d)Market value of an existing building owned by the company which will be used to thanufacture the new printers
e)Increase in inventory of row materials to manufacture the printers

Answer 1

Interest on a loan taken to finance Evershine Corporation's new project should be excluded from the cash flow calculations for NPV because it is a financing cost not directly related to the operations of the project.

Step-by-step explanation:

When Evershine Corporation is evaluating the project to manufacture high-tech printers and calculating the Net Present Value (NPV), certain items should not be included in the cash flow calculations. Among the choices provided, interest on a loan which was taken to finance the new project should be excluded.

This is because interest is a financing cost and NPV calculations are concerned solely with operational cash flows that affect the firm's valuation. NPV focuses on revenues and costs that are directly related to the project's operations such as increased or decreased sales, changes in working capital like accounts receivable or inventory levels, and the use of existing assets like a building.