Which of the following statements is correct?
A)A firm has estimated that it will save $40,000 in utility expenses annually if it replaces an old machine with a new, more technologically advanced machine. The $40,000 is a relevant cash flow that should be included in the computation of the machine's supplemental operating cash flows.
B)Inflation does not need to be considered in capital budgeting analyses.
C)The tax deduction associated with a project's depreciation expense is not a relevant cash flow in capital budgeting analyses.
D)The sunk costs associated with a project are relevant cash flows that should be included in capital budgeting analyses.
E)The cost of advertising a product that the firm currently produces and sells is a relevant cash flow that should be included in the evaluation of a new capital budgeting project.

Question

Quizplus · Accepted Answer

The estimated savings of $40,000 in utility expenses is a relevant cash flow as it is a direct result of the capital budgeting decision to replace the old machine with a new one.

Answer: E
 The cost of advertising a current product is not a relevant cash flow for evaluating a new capital budgeting project. The capital budgeting decision focuses on future cash flows and expenses directly related to the new project.

Which of the Following Statements Is Correct