Cash Flow Estimation in Capital Budgeting

Very Easy Capital Budgeting Cash Flow Estimation

When conducting a capital budgeting analysis, it is essential to accurately estimate the cash flows associated with a potential investment. A company is considering a new project and expects to incur the following cash flows in the next five years:

Year 1: $50,000
Year 2: $60,000
Year 3: $70,000
Year 4: $80,000
Year 5: $90,000

To evaluate the project's viability, the company will calculate the net present value (NPV) of these cash flows. Which of the following statements about cash flow estimation in capital budgeting is true?

Only operating cash flows should be included in cash flow estimation.

All cash inflows and outflows related to the project, including the initial investment, should be included.

Sunk costs should be included in cash flow estimation.

Hint

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