Question

Which of the following cash flows are the incremental cash flows? (Can have more than 1 choice)

1. $300,000 paid two years ago to purchase a land that will be used in the new project

2. The market value of the land now is $300,000

3. $9,000 initial inventory of the project products

4. Sales of old product will decline by $200,000 if new project starts

5. $3,000 interest payment in the third year

6. Tax payment of $5,200 in the second year

Answer 1

Answer : Correct Option is 2.,3., 4,and 5

Reason : Incremental Cash Flows are those cash flows which are additional to the firm.Market value of the land is the Opportunity cost of that the firm already owns. Initial Outlay of net working capital is due to addition of new product line. decline of  Sales of old product will be considered as it occurs if the project starts and tax payment are also considered as relevant.But Sunk cost and financing cost are not to be taken as  incremental cash flows.