Which of the following is (are)a basic principle(s)when estimating a project's cash flows?
A) cash flows should be measured on a pre-tax basis
B) cash flows should ignore depreciation since it is a non-cash charge
C) only direct effects of a project should be included in the cash flow calculations
D) cash flows should be measured on an incremental basis
E) all of the above

Question

Quizplus · Accepted Answer

The basic principles when estimating a project's cash flows are that cash flows should be measured on an incremental basis, meaning they should reflect the changes in cash flows between taking on the project and not taking on the project. Direct effects of the project should be included in the cash flow calculations, but not indirect effects. Additionally, cash flows should be measured on a pre-tax basis to account for potential tax implications. However, depreciation should not be ignored as it can still impact taxes and should be included in cash flow calculations. Therefore, only choice D accurately reflects a basic principle of estimating a project's cash flows.

Which of the Following Is (Are)a Basic Principle(s)when Estimating a Project's