Which of the following statements concerning the principles underlying the capital budgeting process is most accurate?...
Which of the following statements concerning the principles underlying the capital budgeting process is most accurate?
| Financing costs should be reflected in a project's incremental cash flows |
| The net income for a project is essential for making a correct capital budgeting decision. |
| Cash flows should be based on opportunity cost. |
Homework Answers
Option "C" is correct, i.e., Cash flows should be based on opportunity cost.
The net present value decision tool is a more common and more effective in the investment decision making process.
The relevant cash flows for an investment are its incremental, after-tax, cash flows, which ignore financing costs and reflect adjustments for any non-cash charges, typically depreciation.
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