Question

Which of the following are considered relevant cash flows?

a) Cash flows from beneficial spillover effects
b) Cash flows from opportunity costs
c) Cash flows from erosion effects
d) Cash flows from sunk costs

Answer 1

Relevant cash flows are cash flows that are directly related to a decision or investment. They can include cash flows from beneficial spillover effects, opportunity costs, erosion effects, and sunk costs.

Step-by-step explanation:

Relevant Cash Flows

In finance, relevant cash flows are the cash flows that are directly related to a decision or investment. These cash flows can include:

1. Cash flows from beneficial spillover effects: These are positive cash flows that result from an investment or decision and have a positive impact on other related activities.
2. Cash flows from opportunity costs: These are the cash flows that result from giving up the next best alternative when making a decision.
3. Cash flows from erosion effects: These are the negative cash flows that result from a new investment or decision negatively impacting existing activities.
4. Cash flows from sunk costs: These are costs that were incurred in the past and cannot be recovered, and therefore should not be considered in current decision-making.

For example:

• If a company invests in research and development for a new product, the cash flows from the sales of the new product can be considered relevant cash flows.
• If a company decides to renovate its manufacturing facility, the cash flows from potential disruptions to ongoing production can be considered relevant cash flows.