Which of the Following Statements Concerning Cash Flow Evaluation in Capital

question 41

Multiple Choice

Which of the following statements concerning cash flow evaluation in capital budgeting is correct?

• A) When determining a project's terminal cash flows, it is generally assumed that the firm's operations do not return to the same level as they were before the project was purchased.
• B) Any change in depreciation expense must be computed as it affects the cash flow of a project.
• C) The relevant marginal cash flows associated with a project should always include depreciation, because depreciation is an annual operating expense that requires a cash payment.
• D) If an asset is depreciated using the Modified Accelerated Cost Recovery System (MACRS), its depreciable basis is the amount that can be depreciated over the asset's useful life, which generally includes the purchase price minus any shipping and installation charges or other costs that are incurred in order to prepare the asset for use.
• E) The sunk costs associated with an investment proposal are relevant cash flows for capital budgeting analysis, so they should not be included in the computation of the marginal cash flows.

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Definitions:

Percent Change

A mathematical calculation that shows how much a quantity has increased or decreased in comparison to its previous value, often expressed as a percentage.

Base Period

An initial time period used as a reference point for comparison with subsequent time periods, often in economics or financial analyses.

Analysis Period

A specific time frame over which economic or financial performance is examined.

Horizontal Analysis

Financial analysis technique that compares account values reported on financial statements over two or more periods to identify trends and growth patterns.