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 the project's estimated cash flows.
B) Only incremental cash flows are relevant when making accept/reject decisions.
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) 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 will have no effect on the cash flows used in the analysis.

Question

Quizplus · Accepted Answer

Only incremental cash flows are relevant in capital budgeting because we are interested in the cash flows that will result from accepting or rejecting the project, not the total cash flows of the company. Incremental cash flows are the difference between the cash flows with the project and without the project, which helps us determine the project's impact on the company's overall cash flows. The other rules listed are also important in capital budgeting analysis, but B is the only correct one because it accurately reflects the relevance of incremental cash flows.

Which of the Following Rules Is Correct for Capital Budgeting