What is the correct rule for capital budgeting analysis?
A)The interest paid on funds borrowed to finance a project must be included in the project's estimated cash flows.
B)Only incremental cash flows are relevant when making accept/reject decisions.
C)Sunk costs are not included in the annual cash flows, but they must be deducted from the PV of the project's other costs when reaching the accept/reject decision.
D)If a product is competitive with some of the firm's other products, this fact should be incorporated into the estimate of the relevant cash flows. However, if the new product is complementary to some of the firm's other products, this will have no effect on the cash flows used in the analysis.

Question

Quizplus · Accepted Answer

The correct rule for capital budgeting analysis is to consider only incremental cash flows when making accept/reject decisions. Incremental cash flows refer to the additional cash flows that will result from undertaking the project. Sunk costs, which are costs that have already been incurred and cannot be recovered, are not included in the cash flows since they are irrelevant to the decision-making process. The interest paid on funds borrowed to finance the project would be included in the cash flows, but only if the interest expense is incremental to the project. Finally, the competitive or complementary nature of the new product with the firm's existing products should be incorporated into the cash flow estimates, as these factors can have an impact on the success of the project.

What Is the Correct Rule for Capital Budgeting Analysis