Which of the following statements is CORRECT?
A) An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to increase.
B) The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not.This is another reason to favor the NPV.
C) Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified.However, the payback method does not.
D) Identifying an externality can never lead to an increase in the calculated NPV.
E) An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations.If the project would have a favorable effect on other operations, then this is not an externality.

Question

Quizplus · Accepted Answer

An externality refers to a situation where the actions of a firm or project have an impact on parties not directly involved in the transaction. The example given in choice A, where a bank's new office increases deposits in its other offices, is an example of a positive externality affecting the bank's other operations.

Which of the Following Statements Is CORRECT