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sir in this question i don’t understand why savings in advertisement costs have not been added while calculating NPV? After all savings are all relevant costs as future incremental cash based inflow, so they should be added as a part of cash inflows, but they have totally ignored it. why??
the reasoning that they have provided is so ludicrous. here it is:
“Although the company will save money by advertising in its existing hotels, this is not a change in cash flow as a result of the project and is not included in cash flows. (In effect the benefit from the savings is present as there is no cash outflow for advertising.)”
sir clearly had it not been for the theme park the $2m savings p.a. would not have occurred. so why not consider it as relevant saving? and show it as cash inflow?
It is not ludicrous at all.
They are using existing advertising campaigns. So whatever they are currently spending they will still me spending – no more or no less. So they will not be spending an extra 2 million a year on advertising.
sir how could the sentence have been different, that we would have had to make an adjustment for relevant saving? and hence show it as a part of NPV.
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