Nirvana Chip Designs has finished designing its next generation of chips, the XJ5000 series and is getting ready to start production. As the analyst on the project, you are required to prepare pro forma free cash flows. Which of the following are relevant to your analysis?

a. Design cost for the chips. (Select the best choice below.)

A.

This is relevant as it represents cannibalization of existing sales.

B.

This is irrelevant as it represents existing overhead.

C.

This is relevant because it is an investment in working capital.

D.

This is irrelevant because it is a sunk cost.

b. Potential lost sales of the XJ4000 chips. (Select the best choice below.)

A.

This is relevant as it represents cannibalization of existing sales.

B.

This is relevant because it is an investment in working capital.

C.

This is irrelevant as it represents existing overhead.

D.

This is irrelevant because it is a sunk cost.

c. Proportional cost of the corporate jet lease. (Select the best choice below.)

A.

This is irrelevant because it is a sunk cost.

B.

This is relevant as it is a capital investment.

C.

This is relevant because it is an investment in working capital.

D.

This is irrelevant as it represents existing overhead.

d. Start-up investment in raw materials. (Select the best choice below.)

A.

This is relevant because it is an investment in working capital.

B.

This is irrelevant because it is a sunk cost.

C.

This is irrelevant as it represents existing overhead.

D.

This is relevant as it represents cannibalization of existing sales.

e. Upgrades to the chip fabrication facility required if the chip is produced. (Select the best choice below.)

A.

This is irrelevant because it is a sunk cost.

B.

This is relevant as it represents cannibalization of existing sales.

C.

This is irrelevant as it represents existing overhead.

D.

This is relevant as it is a capital investment.

f. Market research done to guide the development of the new chip. (Select the best choice below.)

A.

This is relevant as an opportunity cost of using the land and buildings on the new chip.

B.

This is irrelevant because it is a sunk cost.

C.

This is relevant as it is a capital investment.

D.

This is relevant because it is an investment in working capital.

g. Market value of land and buildings where new chip will be produced. (Select the best choice below.)

A.

This is relevant as an opportunity cost of using the land and buildings on the new chip.

B.

This is irrelevant as it represents existing overhead.

C.

This is irrelevant because it is a sunk cost.

D.

This is relevant because it is an investment in working capital.