Which of the following statements about capital budgeting analyses is correct?
A)The externalities associated with a project represent important marginal cash flows that should be included in the capital budgeting analysis.
B)Only incremental cash flows, which are the cash flows that will change if a project is purchased, should be included in capital budgeting analyses.
C)The term incremental cash flows refers to only the marginal expected cash inflows, not the outflows, associated with a capital budgeting project.
D)Sunk costs often affect accept/reject decisions and, therefore, they should be included in the estimation of the projects' incremental cash flows.
E)A project's opportunity cost does not affect its expected cash flows, and, therefore, should not be included in the estimation of the incremental cash flows.

Question

Quizplus · Accepted Answer

Incremental cash flows, which are the cash flows that will change if a project is purchased, should be included in capital budgeting analyses. Sunk costs and externalities should not be included in the analysis because they are either irrelevant or difficult to quantify. Opportunity cost should be included in the estimation of the incremental cash flows since it represents the foregone return on the next best alternative investment.

Which of the Following Statements About Capital Budgeting Analyses Is