2D1B CORA LEWIS IS PERFORMING AN ANALYSIS TO DETERMINE IF HER FIRM SH...

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CSO: 2D1b

LOS: 2D1b

Cora Lewis is performing an analysis to determine if her firm should invest in new

equipment to produce a product recently developed by her firm. The other option would

be to abandon the product. She uses the net present value (NPV) method and discounts at

the firm’s cost of capital. Lewis is contemplating how to handle the following items.

I.

The book value of warehouse space currently used by another division.

II.

Interest payments on debt to finance the equipment.

III. Increased levels of accounts payable and inventory.

IV. R&D spent in prior years and treated as a deferred asset for book and tax

purposes.

Which of the above items are relevant for Lewis to consider in determining the cash

flows for her NPV calculation?

a.

I, II, III and IV.

b.

II and III only.

c.

III only.

d.

IV only.