Texts: EnergoMax Batteries is a lithium battery producer whose main customers are the electric vehicle manufacturers. EnergoMax's management team is contemplating a new generation of product, CellMaster 3.0, which has 50% more capacity and 30% shorter charging time than its current flagship product, CellMaster 2.0. If the company were to launch this new product, it would need to build a new factory on a piece of land the company already owns. There is a warehouse on this piece of land that needs to be demolished for the new factory to be built. The company spent $1.5 million last quarter on market surveys to determine the extent of demand for this new product. Now EnergoMax Batteries must decide whether to build the new factory for CellMaster 3.0.
Which of the following should be included as part of the incremental cash flows for the proposed new CellMaster 3.0? For each item, answer "Yes" if it should be included as part of the incremental cash flow, and "No" if not. Provide a brief explanation for each of your answers.
a) The cost of the land when it was purchased.
b) The cost of demolishing the abandoned warehouse and clearing the lot.
c) Construction costs for the new factory.
d) Interest expense on the debt borrowed to pay the construction costs.
e) The $1.5 million spent on market research to evaluate customer demand.
f) The value of the land if sold.
g) The loss of sales in the existing product, CellMaster 2.0, if customers who previously purchased CellMaster 2.0 become customers of CellMaster 3.0.