Which of the Following Statements Is CORRECT

question 41

Multiple Choice

Which of the following statements is CORRECT?

• A) An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality.
• B) An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline.
• C) The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
• D) Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.

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Definitions:

Financial Statements

Official records that outline the financial activities and condition of a business, including the balance sheet, income statement, and cash flow statement.

Retained Earnings

The portion of a company's profits that is kept or retained rather than being paid out as dividends to shareholders.

Accounts Receivable

Receivables from customers for products or services provided by a company, which are yet to be paid.

Bad Debt Reserve

An accounting provision representing the estimate of uncollectible amounts from customers, used to cover potential losses.