Question

A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct?

a) The lot is not an incremental cash flow because it is not being utilized at this time.
b) The lot is an incremental cash flow because it represents an opportunity cost.
c) The lot is an incremental cash flow because it represents a sunk cost.

Answer 1

The lot is an incremental cash flow because it represents an opportunity cost.

Step-by-step explanation:

The importance of cash flow for project use is that It is a change in the firm's total future cash flow that is as a result of a direct output or consequence of the decision of that particular project.

Incremental cash flows

This is commonly refered to as tbe said difference obtained between or when there is a firms future cash flows with a project and those without a project. As it is used for a project evluation, it comprises of any and all changes in the firm's future cash flows that are a direct consequence of taking the project.

An Opportunity cost?

This is simply refered to as the most essential or valuable alternative (other choice) that is given up if a particular investment is undertaken by an organization or firm.