Name and describe three issues that can affect the incremental cash fl

Name and describe three issues that can affect the incremental cash flow of a new project.

What will be an ideal response?

ANSWER

Answer: Examples of issues that can affect the incremental cash flow of a new project are: Sunk Costs, Opportunity Costs, Erosion Costs, Synergy Gains, Working Capital, Capital Expenditures, and Depreciation and Cost Recovery of Divested Assets.
SUNK COSTS: Sunk costs are costs that have already been incurred or would be spent regardless of the decision to accept or reject the project. Since these costs will be incurred anyway, they are not part of the decision to accept or reject the project. Sunk costs cannot be reversed.
OPPORTUNITY COSTS: An opportunity cost is a benefit forgone due to the selection of a new project. In a sense, it is a cash inflow that never occurs but would have occurred had we not undertaken the new project.
EROSION COSTS: Erosion costs occur whenever a new product competes against a company’s already existing products and reduces the sales of these existing products. Only the net additional revenue and costs should be included in the incremental cash flow—the increase in overall sales and costs to the company.
SYNERGY GAINS: Synergy gains are gains that result when a new product is introduced that complements another current product of the firm, thereby increasing the sales of the current product.
WORKING CAPITAL: Working capital involves the change in current assets and current liabilities that occurs when a new project is introduced. In many cases, the costs of any increase in working capital will be at least partially offset with termination of the project when the working capital is “released.”