The cash flows of a project should:
A)be computed on a pretax basis.
B)include all sunk costs and opportunity costs.
C)include all incremental and opportunity costs.
D)be applied to the year when the related expense or income is recognized by GAAP.
E)include all financing costs related to new debt acquired to finance the project.

Question

Quizplus · Accepted Answer

The cash flows of a project should include all incremental and opportunity costs. This means that only costs and revenues that are directly related to the project and differ from the current situation should be included. Sunk costs, which are costs that have already been incurred and cannot be recovered, should not be included. Financing costs related to new debt are not relevant to the project's cash flows and should be considered separately. The cash flows should also be computed on an after-tax basis to reflect the true economic impact of the project.

The Cash Flows of a Project Should