Question

Which of the following statements is correct? Select one: a. An asset that is sold for less than book value at the end of a project's life will generate a loss for the firm and will cause an actual cash outflow attributable to the project. b. Only incremental cash flows are relevant in project analysis and the proper incremental cash flows are the reported accounting profits because they form the true basis for investor and managerial decisions. c. It is unrealistic to expect that increases in net operating working capital that are required at the start of an expansion project are simply recovered at the project's completion. Thus, these cash flows are included only at the start of a project. d. Equipment sold for more than its book value at the end of a project's life will increase income and, despite increasing taxes, will generate a greater cash flow than if the same asset is sold at book value. e. All of the statements above are false.

Answer 1

Answer:

d. Equipment which is sold for an amount more than the book value in the end its life will increase income, and despite of increasing taxes, it will generate greater cash flows than if the same asset is sold at book value.

Explanation:

When an equipment is sold for a value which is more than book value then there is a profit which is called capital gain if asset is capital in nature.

On such amount of profit, the company has to pay mandatory taxes, the tax rate varies, but since the tax is paid on amount of profit only and not on the net consideration, even after taxes the cash flow will increase from such transaction.

Thus, following statement is correct

d. Equipment which is sold for an amount more than the book value in the end its life will increase income, and despite of increasing taxes, it will generate greater cash flows than if the same asset is sold at book value.