Which of the following is not a relevant cash flow?Initial investmentWorking capitalSunk costsAfter-Tax Operating incomeDepreciation tax savings
Question
Which of the following is not a relevant cash flow?Initial investmentWorking capitalSunk costsAfter-Tax Operating incomeDepreciation tax savings
Solution
The cash flow that is not relevant among the options provided is the Sunk costs.
Here's why:
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Initial Investment: This is the initial outlay of cash needed to start a project or investment. It's relevant because it's a direct cost that needs to be recovered through the cash flows generated by the project or investment.
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Working Capital: This is the cash needed to fund the day-to-day operations of a business or project. It's relevant because it directly impacts the cash flows of the business or project.
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Sunk Costs: These are costs that have already been incurred and cannot be recovered. They are not relevant to future cash flows because they cannot be changed by any future actions or decisions.
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After-Tax Operating Income: This is the income generated by a business or project after all operating expenses and taxes have been paid. It's relevant because it's a direct measure of the cash flows generated by the business or project.
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Depreciation Tax Savings: This is the tax savings generated by the depreciation of assets used in a business or project. It's relevant because it directly impacts the cash flows of the business or project by reducing the amount of taxes paid.
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