Which of the Following Statements Is Correct

question 162

Multiple Choice

Which of the following statements is correct?

• A) In a capital budgeting analysis where part of the funds used to finance the project are raised as debt,failure to include interest expense as a cost when determining the project's supplemental operating cash flows will lead to an upward bias in the NPV.
• B) The preceding statement would be true if "upward" were replaced with "downward."
• C) The existence of "externalities" reduces the NPV to a level below the value that would exist in the absence of externalities.
• D) If one of the assets that would be used by a potential project is already owned by the firm,and if that asset could be leased to another firm if the project is not undertaken,then the net rent that could be obtained should be charged as a cost (initial investment outlay)to the project under consideration.
• E) The rent referred to in statement d is a sunk cost,and as such it should be ignored.

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Definitions:

Option

A financial derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.

Call Option

An economic agreement that provides the bearer the option, without the necessity, to purchase a share, bond, commodity, or different asset at an agreed-upon price during a determined timeframe.

Derivative Security

A financial security whose value is determined by or derived from an underlying asset or group of assets, such as stocks, bonds, commodities, or market indices.

Fixed Price

A contractually agreed-upon price for goods or services that is not subject to any changes in cost.