Interest payments on debt to finance the equipment (II) are not relevant, because the interest is already incorporated into the required rate of return that is used to discount the future cash flows from the project.
R&D spent in prior years and treated as a deferred tax asset for book and tax purposes (IV) is not relevant. Even though it will affect taxes payable in cash during the life of the project, which will in turn affect cash flow, it relates to money already spent (sunk costs). Thus the amount of the deferred tax asset and the effect it has on future cash flows will not be changed by the company's decision to invest or not invest in this project. Since it will be no different regardless of what decision is made, it is not relevant.
Increased levels of accounts payable and inventory (III) are relevant, because they are components of any working capital increase that will take place because of the new project. The book value of the warehouse space currently used by another division (I) is not relevant, because that is a cost that the company will have no matter what decision it makes about producing this product. Interest payments on debt to finance the equipment (II) are not relevant, because the interest is already incorporated into the required rate of return that is used to discount the future cash flows from the project. R&D spent in prior years and treated as a deferred tax asset for book and tax purposes (IV) is not relevant. Even though it will affect taxes payable in cash during the life of the project, which will in turn affect cash flow, it relates to money already spent (sunk costs). Thus the amount of the deferred tax asset and the effect it has on future cash flows will not be changed by the company's decision to invest or not invest in this project. Since it will be no different regardless of what decision is made, it is not relevant.
The book value of the warehouse space currently used by another division (I) is not relevant, because that is a cost that the company will have no matter what decision it makes about producing this product. Interest payments on debt to finance the equipment (II) are not relevant, because the interest is already incorporated into the required rate of return that is used to discount the future cash flows from the project. R&D spent in prior years and treated as a deferred tax asset for book and tax purposes (IV) is not relevant. Even though it will affect taxes payable in cash during the life of the project, which will in turn affect cash flow, it relates to money already spent (sunk costs). Thus the amount of the deferred tax asset and the effect it has on future cash flows will not be changed by the company's decision to invest or not invest in this project. Since it will be no different regardless of what decision is made, it is not relevant.
|
