A Company Is Considering a Proposed New Plant That Would

question 26

Multiple Choice

A company is considering a proposed new plant that would increase productive capacity.Which of the following statements is correct?

• A)In calculating the project's operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC. If interest were deducted when estimating cash flows, it would in effect be "double-counted."
• B)Since depreciation is a noncash expense, the firm does not need to deal with depreciation when calculating the operating cash flows.
• C)When estimating the project's operating cash flows, it is important to include any opportunity costs and sunk costs, but the firm should ignore cash flow effects of externalities since they are accounted for in the discounting process.
• D)Capital budgeting decisions should be based on before-tax cash flows.

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Definitions:

Multiple Vehicles

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Involved Alcohol

Situations or cases in which alcohol plays a part or is a contributing factor.

Lower Class

A socio-economic group characterized by low income, education, and occupational status.

Class Rank

A measure of how a student's performance compares to others in their class, often used in educational systems to rank students.