Question

Is this included when computing free cash flows for a project? Explain why it is or isn't.

Cannibalization of the same firm's other sales

Answer 1

Please find below the solution.. let me know if you need any clarification…

Yes :Cannibalization of the same firm's other sales should be included when computing the free cash flow for a project.

While evaluating the project we need to include all the opportunity cost which is relevant for decision making. Cannibalization of the same firm's other sales means that due to introduction of this project existing product's sales will be reduded. Therefore impact of loss of net income after tax should be adjusted while computing the free cash flow.