A food processing company has just developed a new kind of soup. It is now trying to decide whether to build a plant and put the soup into production. In undertaking this capital budgeting exercise which of the following cash flows should be treated as incremental when deciding whether to go ahead and produce the soup?
- The research and development costs that were incurred developing the soup.
- The value of the land the plant will be built on which is currently owned by the company (and could be sold otherwise).
- The consequent reduction in the sales of the company's existing soup brands (assuming no competitor is planning to introduce a similar soup).
- The salvage value of the plant and equipment at the end of its planned life.
- Marketing expenses for the product.
- A proportion of expenses for the head office assuming these expenses are independent of whether soup is produced.
- Interest Payments.
- Dividend Payments.
- The expenditures five years from now which will be necessary to ensure the plant meets regulations which will come into force then.