Chapter8:NetPresentValueandCapitalBudgeting8.1a.Yes,thereductioninthesalesofthecompany’sotherproducts,referredtoaserosion,andshouldbetreatedasanincrementalcashflow.Theselostsalesareincludedbecausetheyareacost(arevenuereduction)thatthefirmmustbearifitchoosestoproducethenewproduct.Yes,expendituresonplantandequipmentshouldbetreatedasincrementalcashflows.Thesearecostsofthenewproductline.However,iftheseexpenditureshavealreadyoccurred,theyaresunkcostsandarenotincludedasincrementalcashflows.No,theresearchanddevelopmentcostsshouldnotbetreatedasincrementalcashflows.Thecostsofresearchanddevelopmentundertakenontheproductduringthepast3yearsaresunkcostsandshouldnotbeincludedintheevaluationoftheproject.Decisionsmadeandcostsincurredinthepastcannotbechanged.Theyshouldnotaffectthedecisiontoacceptorrejecttheproject.Yes,theannualCCAexpenseshouldbetreatedasanincrementalcashflow.CCAexpensemustbetakenintoaccountwhencalculatingthecashflowsrelatedtoagivenproject.WhileCCAisnotacashexpensethatdirectlyaffectscashflow,itdecreasesafirm’snetincomeandhence,lowersitstaxbillfortheyear.BecauseofthisCCAtaxshield,thefirmhasmorecashonhandattheendoftheyearthanitwouldhavehadwithoutexpensingdepreciation.No,dividendpaymentsshouldnotbetreatedasincrementalcashflows.Afirm’sdecisiontopayornotpaydividendsisindependentofthedecisiontoacceptorrejectanygiveninvestmentproject.Forthisreason,itisnotanincrementalcashflowtoagivenproject.Dividendpolicyisdiscussedinmoredetailinlaterchapters.Yes,theresalevalueofplantandequipmentattheendofaproject’slifeshouldbetreatedasanincrementalcashflow.Thepriceatwhichthefirmsellstheequipmentisacashinflow,andanydifferencebetweenthebookvalueoftheequipmentanditssalepricewillcreategainsorlossesthatresultineitherataxcreditorliability.Yes,salaryandmedicalcostsforproductionemployeesonleaveshouldbetreatedasincrementalcashflows.Thesalariesofallpersonnelconnectedtotheprojectmustbeincludedascostsofthatproject.Thus,thecostsofemployeeswhoareonleaveforaportionoftheprojectlifemustbeincl