Which of the Following Statements Is CORRECT

question 14

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 increase.
• 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.
• E) Identifying an externality can never lead to an increase in the calculated NPV.

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Definitions:

Notes Receivable

Financial assets representing the right to receive payments from a debtor pursuant to a written promise or agreement.

Direct Write-off Method

An accounting method where uncollectible accounts receivable are directly written off against income at the time they are deemed unrecoverable.

Balance Sheet

A list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year.

Cash Realizable Value

The net amount of cash expected to be received from accounts receivable and other assets, taking into account any allowances for doubtful accounts.