Which of the Following Statements Best Describes Externalities

question 47

Multiple Choice

Which of the following statements best describes externalities?

• 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 favourable 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 favour 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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