The answer to the question is highlighted in red. Explanations are highlighted in green.
20. When evaluating the cash flows associated with a capital budgeting project, shipping and installation costs associated with the purchase of an asset, such as a lathe, are considered part of the
a. initial
investment outlay; these expenses effectively are part of the asset’s purchase
price.
b. incremental operating cash flows because
shipping and installation costs represent expenses that have to be written off
over the life of the asset.
c. terminal cash flows, because these
expenses aren’t paid until the end of the asset’s life.
d. sunk costs because these expenses do not affect any current or future cash flows associated with investing in the asset.
e. None of the above is a correct answer.
The initial investment outlay includes
cash flows that occur only once, which is at the beginning of the life of the
project. In other words, these cash flows occur at the time the project is
purchased—that is the initiation of the project. Based on this definition, only
answer a can be correct.