Question

The Shoe Box is considering adding a new line of winter footwear to its product lineup. Which of the following are relevant cash flows for this project?

I. Decreased revenue from products currently being offered if this new footwear is added to the lineup
II. Revenue from the new line of footwear
III. Money spent to date looking for a new product line to add to the store's offerings
IV. Cost of new counters to display the new line of footwear
I and IV only
II and IV only
II and III only
I, II, and IV only
II, III, and IV only

Answer 1

I, II, and IV are relevant cash flows for The Shoe Box's consideration of adding a new line of winter footwear to its product lineup. Option D is answer.

Step-by-step explanation:

Relevant cash flows in a project evaluation context are those that are directly associated with the decision being made. In this case, decreased revenue from current products (I) is relevant because it represents a potential negative impact on the overall cash flow due to the introduction of the new line. Revenue from the new line of footwear (II) is obviously relevant, as it represents a positive cash inflow directly linked to the new project. The cost of new counters (IV) is relevant because it represents an upfront cost associated with the project.

Money spent looking for a new product line (III) is not a relevant cash flow in this context since it's a sunk cost, meaning it has already been incurred and cannot be changed by the decision to add the new line.

Option I, II, and IV is the answer. Option D is answer.