Which of the Following Rules Is CORRECT for Capital Budgeting

question 73

Multiple Choice

Which of the following rules is CORRECT for capital budgeting analysis?

• A) The interest paid on funds borrowed to finance a project must be included in estimates of the project's cash flows.
• B) Only incremental cash flows,which are the cash flows that would result if a project is accepted,are relevant when making accept/reject decisions for capital budgeting projects.
• C) Sunk costs are not included in the annual cash flows,but they must be deducted from the PV of the project's other costs when reaching the accept/reject decision.
• D) A proposed project's estimated net income as determined by the firm's accountants,using generally accepted accounting principles (GAAP),is discounted at the WACC,and if the PV of this income stream exceeds the project's cost,the project should be accepted.
• E) If a product is competitive with some of the firm's other products,this fact should be incorporated into the estimate of the relevant cash flows.However,if the new product is complementary to some of the firm's other products,this fact need not be reflected in the analysis.

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Definitions:

Standard Deviation

A measure of the amount of variation or dispersion in a set of values, indicating how much the values differ from the mean of the set.

Normal Curve

Also known as the Gaussian distribution, a bell-shaped curve that is symmetric about the mean, showing the distribution of variables as naturally occurring in many processes.

Uniform Probability Density Function

A type of probability distribution in which all outcomes are equally likely, represented by a flat, constant function over its range.

Continuous Probability Distribution

A type of probability distribution where the possible outcomes are any values within certain ranges or intervals.