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Question:
Johnson's Jar Lids is deciding whether to begin producing jars. Johnson's pays a consultant $50,000 for market research that concludes Johnson's sales of jar lids will increase by 5% if it also produces jars. In choosing the cash flows to include when evaluating a project to begin producing jars, Johnson's should:
A
exclude the cost of the market research and include the effect on the sales of jar lids.
explanation
Sunk costs should be excluded from cash flows, as they are costs that cannot be avoided even if the project is not undertaken. Externalities, such as positive or negative effects of accepting a project on sales of the company's existing products, should be included in the cash flows.
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