3. Identifying incremental cash flows Aa Aa When firms make capa budgeting decisions, they should concern themselves with incremental cash flows, not net income, when evaluating To debermine the incremental cash flows associated with a capital project, an analyst should include all of the following except O O O O The project's fixed-assat expenditures The project's financing costs Changes in net working capital assaciated with the project The project's depreciation expense Indirect cash flows often affect a firm's capital budgeting dedsions. However, some of these indirect cash flows are relevant to capital budgeting decisions (because they represent marginal cash flows that depend on the project's acceptance), but athers should be ignored. are cash flows that the firm forgoes as a result of accepting the project under consideration. In general, these are cash opportunity costs alerative to the project. Sunk costs Cannibalization Consider the case of Bumbly Products Inc. The company is evaluating a capital budgeting project and has come across a few issues that require special attention. Classify each item as a sunk cost, cannibalization, apportunity cost, or a change in net working capital (NWC). Then, in the last column, indicate whether the item should be included in the project's analysis or nat. Sunk opportunity change Include in Cannibalization in Nwc the Analysis? The new project is expected to increase the company's overall sales, but it will take away some share from some of its existing products. The factory that the project will use could be used fon another project that is expecbed to have a slighty positive net present value (NPV) Before finalizing on this new project, the company tested some earlier prototypes that are nat being used in the current product. For this new product, the company will use an aggressive selling strategy and offer so-day credit to its customers. This will lead to an increase in accounts O of the market The project will use some raw materials that the firm has in its inventory and can sell at a certain price. Suppose Bumbly will be issuing debt to support this project and ather capital budgeting projects this year. The firm's interest expense will increase by $700,000. Should the change in interest expense be subtracted from project cash lows? O Yes O No