CFA Practice Question

CFA Practice Question

A company that sells ice cream is evaluating an expansion of its production facilities to allow the company to also produce frozen yogurt. The expansion project is based on a marketing study that concluded producing frozen yogurt would increase the company's ice cream sales because of an increase in brand awareness. Should an analyst include the cash flows associated with the expected increase in ice cream sales in the calculation of the project's net present value?
A. No, because the projected increase in ice cream sales is an externality.
B. Yes, because the project's NPV will be overstated if the cash flows associated with the projected increase in ice cream sales are not included.
C. Yes, because the project's NPV will be understated if the cash flows associated with the projected increase in ice cream sales are not included.
Explanation: The increase in ice cream sales (externality) should be treated as an incremental cash flow and included in the analysis of the project's net present value.

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