Question

Evershine Corporation is evaluating a project to manufacture high-tech printers as part of its strategy to increase is product offerings theme, Which of the flowing tems should be excluded from the cash flow calculations to determine NPV of the project?

Muture Choice
a. Decrease in sales of current printers when the new printers and introduced
b. increase in accounts receivable needed to finance sales of the new printers
c. Interest on a can which will taken to finance the new project
d. Market value of an existing building owned by the company which will be used to manufacture the new printers
e. increase in inventory of raw materials to manufacture the printers

Answer 1

Interest on a loan taken to finance the new high-tech printer project should be excluded from cash flow calculations for NPV, as it is categorized as a financing cash flow. Increases or decreases in sales, accounts receivable, or inventory are part of operational cash flows and typically included in such evaluations.

Step-by-step explanation:

In evaluating a project for manufacturing high-tech printers, certain items should be excluded from the cash flow calculations to determine the Net Present Value (NPV) of the project. Specifically, interest on a loan which will be taken to finance the new project should be excluded. The reason for this is that interest is considered a financing cash flow rather than an operating cash flow, and the NPV focuses on the latter to assess the profitability of the project. Factors such as increases or decreases in sales, accounts receivable, or inventory, all relate directly to the operational aspect of the project and so are typically included in cash flow calculations. On the other hand, the market value of an existing building may be excluded if not directly related to the incremental cash flows of the project, except if selling the building is part of the financing strategy.