Answer on Economics of Enterprise Question for johnny
he interest paid on funds borrowed to finance a project must be included in the project’s estimated cash flows.
Only incremental cash flows are relevant when making accept/reject decisions.
Sunk costs are not included in the annual cash flows, but they must be deducted from the PV of the project’s other costs when reaching the accept/reject decision.
A proposed project’s estimated net income as determined by the firm’s accountants, using generally accepted accounting principles (GAAP), is discounted at the WACC, and if the PV of this income exceeds the project’s cost, the project should be accepted.
If a product is competitive with some of the firm’s other products, this should be incorporated into the estimate of the relevant cash flows, but if the new product is complementary to some of the firm’s other products, this will have no effect on the relevant cash flows
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