Question

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

1) Opportunity cost
2) Sunk cost
3) Erosion
4) Replicated flows
5) Pirated flows

Answer 1

The term that describes cash flows of a new project offsetting reduced cash flows of an existing project is 'erosion.' It captures the concept of diminished revenues for an existing product due to a new project.

Step-by-step explanation:

The term most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project is erosion. Erosion refers to the negative impact on the revenues or cash flows of an existing product due to the introduction of a new product. As such, when a new project takes away sales from an existing project, the company experiences cash flow erosion.

This is different from opportunity cost, which is the cost of foregoing the next best alternative, and sunk cost, which refers to costs that have already been incurred and cannot be recovered. The other terms, replicated flows and pirated flows, are not standard terms used in the context of financial analysis.