Which Cash Flow Does Not Result from Project Acceptance?

E

Sunk cost is not a relevant cash flow.

Among the options given, the cash flow that does not result from the decision to accept a project is:

A. Externalities.

Externalities are economic effects that occur as a result of a project but are not directly reflected in the cash flows of the project. They can be positive or negative and affect third parties, not the project itself. For example, if a manufacturing plant project creates pollution that harms the local environment, the costs associated with environmental damage would be externalities. Since externalities do not represent direct cash flows to the project, they are not considered as a cash flow resulting from the decision to accept a project.

Let's briefly discuss the other options:

B. Shipping and installation costs: Shipping and installation costs refer to the expenses incurred in transporting and setting up equipment or machinery necessary for the project. These costs are directly related to the project and can be considered as cash outflows.

C. Opportunity costs: Opportunity costs represent the value of the next best alternative foregone when a particular choice is made. In the context of project evaluation, opportunity costs refer to the cash flows that could have been obtained from the best alternative investment foregone by accepting the project. These costs are considered in the analysis as cash outflows, representing the benefits lost by choosing one project over another.

D. Changes in working capital: Changes in working capital involve the fluctuations in the current assets and liabilities of a project, such as inventory, accounts receivable, and accounts payable. When a project is accepted, there may be initial investments required in working capital, or changes in working capital during the project's life. These changes are considered as cash flows resulting from the decision to accept the project.

E. Sunk costs: Sunk costs are costs that have already been incurred and cannot be recovered regardless of the project's outcome. They are not relevant in project evaluation because they are not future cash flows and should not influence the decision-making process. Therefore, sunk costs are not considered as cash flows resulting from the decision to accept a project.

To summarize, among the given options, the cash flow that does not result from the decision to accept a project is A. Externalities. Externalities are economic effects that are not directly reflected in the cash flows of the project.