Question

Which of the following should not be treated as an incremental cash flow when computing the NPV of an investment?

a) a reduction in the sales of a company’s other products caused by the investment.  

b) salary costs for personnel who will be employed only if the project is accepted.  

c) dividend payments by the firm to shareholders.  

d) both a and b.  

e) a, b, and c.  

Answer 1

Due to the reduction in the sales of the comapny's other products there is the reduction in the cash flows from the other products therefore, it  affects the Cash flows of the comapany while computing the NPV.

Salary costs of the peronnel has negative impact on the cash flow of the comapny as it is the expense. So, it will also impact the cash flow of the company while computing the NPV.

Dividend payments  by the firm do not have any impact on the cash flow of the firm therfore, it is not treated as the incremental cash flow while computung the NPV.

Therefore, option c. is correct.