A Company Is Considering a Proposed New Plant That Would

question 7

Multiple Choice

A company is considering a proposed new plant that would increase productive capacity.Which of the following statements is CORRECT?

• A) In calculating the project's operating cash flows,the firm should not deduct financing costs such as interest expense,because financing costs are accounted for by discounting at the WACC.If interest were deducted when estimating cash flows,this would,in effect,"double count" it.
• B) Since depreciation is a non-cash expense,the firm does not need to deal with depreciation when calculating the operating cash flows.
• C) When estimating the project's operating cash flows,it is important to include both opportunity costs and sunk costs,but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process.
• D) Capital budgeting decisions should be based on before-tax cash flows because WACC is calculated on a before-tax basis.
• E) The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.To do otherwise would bias the NPV upward.

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Definitions:

Segments

Divisions or parts into which something is split or divided, often used to describe parts of organisms or structures within them.

Cricoid Cartilage

A ring-shaped cartilage of the larynx, located below the thyroid cartilage, that provides support and structure to the airway.

Paired Cartilages

Paired cartilages refer to symmetrical cartilaginous structures that occur in pairs within the body, contributing to structural support and flexibility in various organs and joints.

Alveolar Expansion

The process of air sacs in the lungs enlarging during inhalation, facilitating gas exchange between the lungs and blood.