(3)2). Which of the Following Statements Is Correct

question 13

Multiple Choice

(3) 2) . Which of the following statements is correct?

• A) In a capital budgeting analysis where part of the funds used to finance the project are raised as debt, failure to include interest expense as a cost in the cash flow statement when determining the project's cash flows will lead to an upward bias in the NPV.
• B) The preceding statement would be true if "upward" were replaced with "downward."
• C) The existence of "externalities" reduces the NPV to a level below the value that would exist in the absence of externalities.
• D) If one of the assets that would be used by a potential project is already owned by the firm, and if that asset could be leased to another firm if the project is not undertaken, then the net rent that could be obtained should be charged as a cost to the project under consideration.
• E) The rent referred to in statement d is a sunk cost, and as such it should be ignored.

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Definitions:

Interest Expense

An expense incurred from borrowing money, represented as the cost of interest for the borrowed funds.

Market Rate

The current price or interest rate at which securities, commodities, or currencies are traded in a competitive and public market.

Straight-line Method

A method of allocating a fixed asset's cost evenly over its useful life for the purpose of depreciation.

Par Value

The face value of a bond or stock as stated by the issuing company, which may not reflect its market value.