Question 1: Why is it important to identify the incremental cash flows in the context of calculating the NPV for capital budgeting purposes? Are you ready to put your knowledge to test by working on the following exercise?
Question Which of the following should be treated as incremental cash flows when computing the NPV of an investment?
a. A reduction in the sales of a company's other products caused by the investment.
b. An expenditure on plant and equipment that has not yet been made and will be made only if the project is accepted.
c. Costs of research and development undertaken in connection with the product during the past three years.
d. Annual depreciation expense from the investment.
e. Dividend payments by the firm.
f. The resale value of plant and equipment at the end of the project's life.
g. Salary and medical costs for production personnel who will be employed only if the project is accepted.