Which of the following statements is CORRECT? a. When evaluating corporate projects it is important to...
Which of the following statements is CORRECT?
a. When evaluating corporate projects it is important to exclude all opportunity costs.
b. Interest expense should be included in project cash flows.
c. In a replacement analysis, we should only focus on the cash flows related to the new machinery.
d. The rate of depreciation will often affect operating cash flows, even though depreciation is not a cash expense.
e. Under the scenario of a cannibalization effect where the new business eats into the company's existing business, the lost cash flows should be treated just like a sunk cost.
Homework Answers
The answer is
d. The rate of depreciation will often affect operating cash flows, even though depreciation is not a cash expense.
The reason is tax benefit is obtained on depreciation expense. Higher depreciation leads to higher savings of tax and vice versa
Opportunity costs must be included in evaluation
Interest expense is not included
Old and new machinery both are considered
Lost cash flows are like opportunity costs and not sunk costs
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