Practice Question
Which of the following statements is most correct?
A) Since depreciation is not a cash expense, it does not affect operating cash flows.
B) Contingent projects are evaluated independently and should be accepted independently.
C) Corporations should include opportunity costs when making investment decisions.
D) Corporations should include sunk costs when making investment decisions.
E) All the statements are false.
Answer +
Final Answer: C) Corporations should include opportunity costs when making investment decisions.
Explanation +
Explanation:
- A) Incorrect. Depreciation does affect operating cash flows through its impact on taxes, even though it is not a cash outflow.
- B) Incorrect. Contingent projects are not evaluated independently because their acceptance depends on other projects.
- C) Correct. Opportunity costs represent the value of the best alternative forgone and must be considered in capital budgeting decisions.
- D) Incorrect. Sunk costs are past costs that should not influence current decisions.
- E) Incorrect. Since C is true, not all statements are false.
Conclusion: Statement C is the only correct choice based on proper capital budgeting principles.