Will we consider an opportunity cost as a factor when making a capital budgeting decision ?

The answer is No ?

308 Part 3 Valuation and the Firm CONCEPT 5. I can expense is not an ovewy owoc it and add it back Wind CHECK port? & Why does normen met working capital pronta canh cufflow? 9.4 Other Effects on Incremental Free Cash Flows include all changes between the firm's free cash flows with the project versus without the When computing the incremental free cash flow of an investment decision, we should other parts of the firm. In this section, we discuss these other effects, some of the polls project. These include opportunities for one due to the project and effects of the proyectos and common mistakes to avoid, and the complications that can arise when forecasting incremental free cash flows. Opportunity Costs need to pay cash to acquire this resource for a new project, it is tempting to assume the metry projects use a resource that the company already owns. Because the firm does nike the resource is available for free. However, in many cases, the resource could provide value opportunity cost The for the firm in another opportunity or project. The opportunity cost of using a resource is value anoce could the value it could have provided in its best alternative use. Because this value is lost when have provided in its best the resource is used by another project, we should include the opportunity cost as a alternative use incremental cost of the project. For example, your company may be considering building a retail store on land that it owns. Even though it already owns the land, it is not free to the store project. If it does not put its store on the land, the company could sell the land, for example. This forgone market price for the land is an opportunity cost of the retail store project COMMON MISTAKE The Opportunity Cost of an Idle Asset A common mistake is to conclude that an asset is currently ide i opportunity cost is zero. For example, the firm might have a warehouse that is currently empty or a machine that is not being sed. Ohen, the asset may have been idled in anticipation of taking on the new project, and would have otherwise been put to use by the firm. Even if the firm has no alternative use for the asset, the firm could choose to sell or rent the asset. The value obtained from the assets alternative use, sale, or rental represents an opport nity cost that must be included as part of the incremental cash flows Project Externalities project externalities Project externalities are indirect Indirect effects of a proj- effects of a project that may increase ect that may increase or or decrease the profits of other busi- decrease the profits of ness activities of the firm. For instance, other business activities some purchasers of Apple's larger iPad of a firm Pro would otherwise have bought Apple's iPad Air. When sales a new product displace sales of an existing product, the situation is often referred "lo Chapter 5, we defined the opportunity cost of capital as the rate you could earn on an alternative ment with equivalent risk. We similarly define the opportunity cost of using an existing asset in a as the cash flow generated by the text best alternative use for the asset