Which of the Following Statements Is CORRECT

question 75

Multiple Choice

Which of the following statements is CORRECT?

• A) If an asset is sold for less than its book value at the end of a project's life,it will generate a loss for the firm,hence its terminal cash flow will be negative.
• B) Only incremental cash flows are relevant in project analysis,the proper incremental cash flows are the reported accounting profits,and thus reported accounting income should be used as the basis for investor and managerial decisions.
• C) It is unrealistic to believe that any increases in net operating working capital required at the start of an expansion project can be recovered at the project's completion.Operating working capital like inventory is almost always used up in operations.Thus,cash flows associated with operating working capital should be included only at the start of a project's life.
• D) If equipment is expected to be sold for more than its book value at the end of a project's life,this will result in a profit.In this case,despite taxes on the profit,the end-of-project cash flow will be greater than if the asset had been sold at book value,other things held constant.
• E) Changes in net operating working capital refer to changes in current assets and current liabilities,not to changes in long-term assets and liabilities,hence they should not be considered in a capital budgeting analysis.

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Definitions:

Total Surplus

The sum of consumer surplus and producer surplus, representing the total benefit to society from the production and sale of a good or service.

External Benefits

Positive effects of a production or consumption activity on third parties not directly involved in the transaction, leading to social or economic benefits.

Total Surplus

The sum of consumer and producer surplus, representing the total net benefit to society from a market transaction.

Socially Efficient Quantity

The level of production of a good or service that results in the optimal combination of economic efficiency and social welfare.