Which of the following statements concerning cash flow evaluation in capital budgeting is correct?
A)When determining a project's terminal cash flows, it is generally assumed that the firm's operations do not return to the same level as they were before the project was purchased.
B)Even though it is a noncash expense, a capital budgeting project's depreciation expense must be computed because it affects the after-tax cash flows of the project.
C)The relevant marginal cash flows associated with a project include depreciation, because it is an annual operating expense that requires a cash payment.
D)Shipping and installation charges are deducted from the purchase price of an asset to compute its depreciable basis.
E)The sunk costs associated with an investment proposal are relevant cash flows for capital budgeting analysis that should be included in the computation of the project's initial investment outlay.

Question

Quizplus · Accepted Answer

Depreciation is a non-cash expense, but it affects the after-tax cash flows of a project since it reduces taxable income. Therefore, it is necessary to compute it when evaluating cash flows in capital budgeting. The other statements are incorrect. It is assumed that the firm's operations will return to their previous level after the project ends, depreciation is not a cash expense and does not require a cash payment, shipping and installation charges are added to the purchase price to compute the depreciable basis, and sunk costs should not be included in the capital budgeting analysis as they are irrelevant to the decision-making process.

Which of the Following Statements Concerning Cash Flow Evaluation in Capital