Which one of the following statements is correct?
A) Project analysis should only include the cash flows that affect the income statement.
B) A project can create a positive operating cash flow without affecting sales.
C) The depreciation tax shield creates a cash outflow for a project.
D) Interest expense should always be included when analyzing cost-cutting projects.
E) A bid price maximizes profits on a project for the bidding firm.

Question

Quizplus · Accepted Answer

A project can create positive operating cash flows without affecting sales if it reduces costs or improves efficiency, for example. The other statements are not correct. Project analysis should include all cash flows, not just those affecting the income statement. The depreciation tax shield creates a tax benefit that reduces cash outflows. Interest expense should only be included in the analysis if the project involves borrowing or refinancing. A bid price should maximize the bidder's expected value, not necessarily profit, and depends on various factors including competition and market conditions.

Which One of the Following Statements Is Correct