When Evaluating the Cash Flows Associated with a Capital Budgeting

question 100

Multiple Choice

When evaluating the cash flows associated with a capital budgeting project, shipping and installation costs associated with the purchase of an asset, such as a lathe, are considered part of the

• A)initial investment outlay because these expenses effectively are part of the asset's purchase price.
• B)incremental operating cash flows because shipping and installation costs represent expenses that have to be written off over the life of the asset.
• C)terminal cash flows, because these expenses aren't paid until the end of the asset's life.
• D)sunk costs because these expenses do not affect any current or future cash flows associated with investing in the asset.
• E)None of the above is a correct answer.

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Definitions:

Sales Adjusted

The net sales figure after deductions such as returns, allowances, and discounts have been accounted for.

Cash Basis

An accounting method that recognizes revenues and expenses only when cash is exchanged.

Cash Basis

An accounting method where revenues and expenses are recorded only when cash is received or paid, regardless of when the transactions occurred.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including the cost of the materials and labor used in creating the good.