To conduct a new 4-year project, HNU Co. will utilize an empty warehouse it currently owns. If the project is rejected, HNU can instead rent the warehouse to another company for four years and receive annual pretax rental income of $40,000. Corporate tax rate is 35%. To accurately calculate the projects cash flow, HNU _________ for the project.

records a -$26,000 as part of each of the four years cash flows (CF1 through CF4).

records a -$40,000 as part of the initial cash flow CF0.

records a $26,000 as part of the first year cash flow CF1.

excludes this rental income as it is a sunk cost.