Which of the Following Statements Is CORRECT

question 38

Multiple Choice

Which of the following statements is CORRECT?

• A) only incremental cash flows are relevant in project analysis, the proper incremental cash flows are the reported accounting profits, and thus reported accounting income should be used as the basis for investor and managerial decisions.
• B) it is unrealistic to believe that any increases in net working capital required at the start of an expansion project can be recovered at the project's completion. working capital like inventory is almost always used up in operations. thus, cash flows associated with working capital should be included only at the start of a project's life.
• C) if equipment is expected to be sold for more than its book value at the end of a project's life, this will result in a profit. in this case, despite taxes on the profit, the end-of-project cash flow will be greater than if the asset had been sold at book value, other things held constant.
• D) changes in net working capital refer to changes in current assets and current liabilities, not to changes in long-term assets and liabilities. therefore, changes in net working capital should not be considered in a capital budgeting analysis.
• E) if an asset is sold for less than its book value at the end of a project's life, it will generate a loss for the firm, hence its terminal cash flow will be negative.

---

Definitions:

Dow Jones Industrial Index

A stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States.

Currency Cross Rates

These are exchange rates between two currencies, neither of which is the domestic currency of the country where the quote is given.

CPI

The Consumer Price Index is a gauge that determines the composite weighted pricing of various consumer products and services, which encompass medical care, food, and transportation.

Base Year

A specific year against which economic or financial data is compared to measure economic performance or inflation.