You are helping to decide whether or not to start a new project. The project would be housed in a building that is currently 70% full. Your project would use the other 30% of the building. This year, the annual electricity cost for the building is $80,000. When your project occupies the building, the annual electricity cost would rise to $100,000. Barney Beancounter, your company accountant, has told you that since you will be occupying 30% of the building, $30,000 of the electric bill would be allocated to your project. Which of the following is true? Show work
You should allocate $30,000 to electricity expense when you determine the incremental cash flows for your new project.
You should not include electricity costs in your incremental cash flows.
When you determine incremental cash flows, you should use $20,000 as the electricity cost.
You should include the $25,000 your team spent on creating the pro forma for this project as an incremental cash flow.
You should allocate 30% of last year’s electric bill to incremental cash flows for the new project.