Question

for the case of an electric car project which of the following costs or cash foows should be categorized as incremental when analyzing whether to invest in the project

divident payments

tax saving reulting from the dpriciation charges

the cost of research and development undertaken for developind electric car during the past three years

the annual depriciation charge

Answer 1

The correct answer is

Tax saving resulting from depreciation change

Tax saving resulting from change in depreciation rate or depreciation method will affect the cash flow of the project, because that should be added as a benefit to the project.

Dividend payment is not related to the project, it is the reward to the shareholders of the company so this should not be a part of the cash flow of project. The cost of research and development is a sunk cost and sunk cost are not included. The annual depreciation charge will be both the cases but any change in depreciation will be incremental.