To Increase Productive Capacity, a Company Is Considering a Proposed

question 70

Multiple Choice

To increase productive capacity, a company is considering a proposed new plant.Which of the following statements is CORRECT?

• A) Since depreciation is a non-cash expense, the firm does not need to deal with depreciation when calculating the operating cash flows.
• B) When estimating the project's operating cash flows, it is important to include both opportunity costs and sunk costs, but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process.
• C) Capital budgeting decisions should be based on before-tax cash flows.
• D) The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.
• E) 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, this would, in effect, "double count" it.

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Definitions:

Environmental Stress

Stress arising from factors in one's environment, such as noise, crowding, or pollution.

Role Incompatibility

A situation where the demands of one's roles conflict with each other, creating difficulty in fulfilling them.

Cooperativeness

The willingness to work together towards common goals or interests.

Assertiveness

The quality of being self-assured and confident without being aggressive, capable of standing up for one's own rights in a respectful manner.