A Company Is Considering a Proposed New Plant That Would

question 50

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:

Happiness Concern

The issue or focus on understanding what factors contribute to human happiness and well-being.

Human Flourishing

A concept in moral philosophy that relates to living well and realizing one's full potential through ethical and virtuous actions.

Golden Mean

Aristotle's concept of finding the desirable middle between two extremes, one of excess and the other of deficiency.

Theory of Moderation

A philosophical principle suggesting that moderation in all things is the key to a good life, avoiding extremes in behavior, beliefs, and actions.