Question

1. Which of the following should you NOT consider as relevant cash flow (flows) when considering the merit of a project?
   1. Interest costs that will occur if the project is financed by debt
   2. Opportunity costs
   3. The cost of a feasibility study that will be paid regardless of the project being undertaken or not

1. i and ii
2. i and iii
3. ii and iii
4. i, ii and iii

Answer 1

Opportunity cost are loss of revenue from selection of a project instead of other.These are not relevant cash flows .

Interest cost will be treated as finance charge and is acash outflow,hence includible in cash flows.

Sunk cost are cost which has been incurred or will be incurred and can't be recovered. It is an irrelevant cost and not included in Total cash flows from a particular project. The cost of a feasibility study that will be paid regardless of the project being undertaken or not is a type of sunk cost and irreverent.

So option (ii) and option (iii) are not be included in cash flows.

So option (C) (ii) and(iii) is the correct answer.