Wansley Inc. is investigating whether to develop a new product. In evaluating whether to go ahead with the project,

Question

Wansley Inc. is investigating whether to develop a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated? a. The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment. b. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year. c. The new product will stimulate sales of some of the firm's other products. d. If the project is accepted, the company must invest $2 million in working capital. However, all of these funds will be recovered at the end of the project's life. e. The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm's products.

Help In Homework · Accepted Answer

Correct answer is option b ) The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year This is becuase cost of debt / interest will be incorporated in WACC and no separate cash flow adjustment required for this. Therefore answer is option b).

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Wansley Inc

Expert Solution

Archived Solution

	a.	The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.
	b.	The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year.
	c.	The new product will stimulate sales of some of the firm's other products.
	d.	If the project is accepted, the company must invest $2 million in working capital. However, all of these funds will be recovered at the end of the project's life.
	e.	The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm's products.