Which of the Following Statements Concerning Cash Flow Evaluation in Capital

question 9

Multiple Choice

Which of the following statements concerning cash flow evaluation in capital budgeting is incorrect?

• A)When determining a project's terminal cash flows, it is generally assumed that the firm's operations return to the same level as they were before the project was purchased.
• B)If a depreciable asset is sold at a price different than its book value, taxes will affect the net cash received from the disposal of the asset at the end of its life.
• C)The relevant marginal cash flows associated with a project should always include depreciation, because depreciation is an annual operating expense that requires a cash payment.
• D)If an asset is depreciated using the Modified Accelerated Cost Recovery System (MACRS), its depreciable basis is the amount that can be depreciated over the asset's useful life, which generally includes the purchase price plus any shipping and installation charges or other costs that are incurred in order to prepare the asset for use.
• E)The sunk costs associated with an investment proposal are not relevant cash flows for capital budgeting analysis, so they should not be included in the computation of the marginal cash flows.

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Definitions:

Z-Test Statistic

A statistical measure used in hypothesis testing, representing the number of standard deviations a data point is from the mean.

Interpret

To explain the meaning of information, data, or actions to understand their significance or implications.

One-Sample Z-Test

A statistical hypothesis test used to determine whether the mean of a single sample is significantly different from a known or hypothesized population mean.

T-Test

An analysis technique designed to assess if the mean values of two separate groups differ significantly.