Question

Which of the following rules is CORRECT for capital budgeting analysis?a. The interest paid on funds borrowed to finance a project must be included in estimates of the project's cash flows.b. Only incremental cash flows, which are the cash flows that would result if a project is accepted, are relevant when making accept/reject decisions for capital budgeting projects.c. Sunk costs are not included in the annual cash flows, but they must be deducted from the PV of the project's other costs when reaching the accept/reject decision.d. A proposed project's estimated net income as determined by the firm's accountants, using generally accepted accounting principles (GAAP), is discounted at the WACC, and if the PV of this income stream exceeds the project's cost, the project should be accepted.e. If a product is competitive with some of the firm's other products, this fact should be incorporated into the estimate of the relevant cash flows. However, if the new product is complementary to some of the firm's other products, this fact need not be reflected in the analysis.

Answer 1

Answer:

b. Only incremental cash flows, which are the cash flows that would result if a project is accepted, are relevant when making accept/reject decisions, is the is CORRECT rule for capital budgeting analysis.

Explanation:

Incremental cash flow is the additional operating cash flow that an organization receives from taking on a new project. The incremental cash flows may be positive or negative.

If it is a positive incremental cash flow, which means the company's cash flow will increase with the acceptance of the project.

If it is negative incremental cash flow, then the company's cash flow will decrease and the project needs to be rejected.