Question

Which of the following statements is FALSE? 

• Net incomes are not cash flows. 

• Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision 

• To the extent that overhead costs are fred and will be incurred in any case, they are incremental to the project and should be included in the capital budgeting analysis. 

• Depreciation is not a cash expense paid by the form 

• None of the above 

Answer 1

Solution:

Which of the following statement is False? - (C) Option C is False

Explanation :

a) Net income are not cashflows, is a true statement. Since in Net Income other non-cash expenses like depreciation and accrued expenses also present and those does not entail cash flows.

b) Incremental earnings are the amoumt which represents the excess income in compare to the other option. For example if option X giving income of $ 10000 and option Y is giving income of $ 15000, then in such case $15000-$10000= $ 5000 is incremental earning, which will be received over option X. Hence this statement is true.

c) If overhead cost is fixed and will be incurred in any case, then in such situations fixed costs are not considered in capital budgeting decisions. These are not considered because they will incurred in either case and will not affect the decision of capital budgeting. For example there is a Fixed cost of $ 5000, which will incurred in both option X and option Y, then such cose is not considered in decision making. Hence, statement to consider fixed cost which will incurred in all case, is false.

d) Depreciation is not a cash expence, rather it is amortisation of fixed cost incurred earlier. Hence, the statement is true.