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:

Project

A planned set of interrelated tasks to be executed over a fixed period and within certain cost and other limitations.

Self-Liquidating Loans

Loans that are structured to be paid off through the cash flow generated by the project or asset they finance.

Interest Rates

The percentage of a sum of money charged for its use, indicating the cost of borrowing money or the return on invested savings.

Net Working Capital

A financial metric that measures a company's ability to pay off its current liabilities with its current assets.