In a discounted cash flow analysis, which cost should Teresa, a financial analyst, exclude?

In a discounted cash flow (DCF) analysis, the focus is primarily on cash flows that are incremental to the project or investment being evaluated. Incremental cash flows are those that directly result from the decision to undertake the project. Costs that do not change as a result of the project being evaluated should not be included, as they do not affect the decision's net present value.

The overhead costs of an existing factory are generally fixed in nature and would be incurred regardless of whether the new project is undertaken or not. Therefore, these costs do not impact the decision-making related to the new investment or project. They remain constant and are not considered incremental to the project; thus, they should be excluded from the analysis to accurately assess the project's potential cash flows.

In contrast, costs like the cost of new equipment, hiring additional staff, and increased marketing activities are directly associated with the new project and would only be incurred if the project is approved. These costs represent additional cash outflows that will have a material impact on the project's financial evaluation and should therefore be included in the DCF analysis.