Question

Question 6 (1 point) Which of the following should NOT be considered when estimating FCF? 1) Sunk cost. 2) Interest Expenses of debt financing. 3) Opportunity cost. 4) All of the above should not be considered. 5) Both a and b should not be considered.

Answer 1

Ans : Sunk cost

Explanation :

Sunk cost is the cost which has no influence on the decision of decision maker. It is a past cost meaning the cost has been already incurred before taking the decision or the obligation its pay has been already decided. Sunks cost continue to occur with the same amount in each alternative course of action and will also be incurred in case no alternative is chosen. Therefore, such cost should be ignored while calculating the future cash flows.

However, both interest cost and opportunity cost are relevant cost as they are specific to the the alternatives and are incurred at different amounts in different course of action.
Payment of Interest expenses will lead to cash outflows.
Opportunity cost is the benefit forgone which could have been realised from the next best alternative. Loss of benefit that could have achieved is also considered as cash outflow.