CAF-7 · Chapter 13 · Question 2 of 15
If a company accepts a new project, it must use a warehouse it currently owns. The company currently rents this warehouse to a tenant for Rs. 1 million a year. If the project proceeds, the tenant will be evicted. In the project's NPV calculation, the lost rent is considered:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) An opportunity cost and must be deducted from the project's cash flows
Explanation
An opportunity cost is the benefit lost by taking one course of action instead of the next best alternative. Because the company loses the Rs. 1 million rental income by undertaking the project, it is a relevant cash outflow for the project appraisal.
More Introduction to Project Appraisal MCQs
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