Which of the Following Statements Is Correct

question 10

Multiple Choice

Which of the following statements is correct?

• A) An asset that is sold for less than book value at the end of a project's life will generate a loss for the firm and will cause an actual cash outflow attributable to the project.
• B) Only incremental cash flows are relevant in project analysis and the proper incremental cash flows are the reported accounting profits because they form the true basis for investor and managerial decisions.
• C) It is unrealistic to expect that increases in net operating working capital that are required at the start of an expansion project are simply recovered at the project's completion. Thus, these cash flows are included only at the start of a project.
• D) Equipment sold for more than its book value at the end of a project's life will increase income and, despite increasing taxes, will generate a greater cash flow than if the same asset is sold at book value.
• E) All of the statements above are false.

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Definitions:

Financial Leverage

The use of borrowed funds to increase the potential return of an investment.

Managers

Individuals in an organization responsible for controlling or administering all or part of a company or similar organization.

Times-Interest-Earned Ratio

A financial metric that measures a company's ability to meet its debt obligations by comparing its interest expenses to its earnings before interest and taxes (EBIT).

Debt Obligations

These are the amounts of money that a company or individual owes to lenders or creditors, which must be repaid according to agreed-upon terms.