Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

Select one:

a. Shipping and installation costs.

b. Cannibalization effects.

c. Opportunity costs.

d. Sunk costs that have been expensed for tax purposes.

e. Changes in net working capital.

d. Sunk costs that have been expensed for tax purposes.

Explanation:

Sunk costs is a cost that has already been spent and has nothing to do with future course of action to be taken, therefore the sunk cost is not included as relevant cost for any decision making.

Option A Shipping and installation costs is a direct and relevant cost that should be included in analysis for decision making. The cost can be avoided by not choosing particular course of action.

Option B is a reduction in sales revenue (volume or price) of other products of the organisation therefore it should also be included in decision making analysis.

Option C: Opportunity cost is a lost revenue that can be achieved by not choosing a particular course of action therefore it is also included in decision making exercise.

Option E: Changes in working capital arising due to opting for a particular project impacts total working capital needs over the life of any project and thus these are relevant and must be included in decision making.