Question

Which of the following statements is incorrect? Group of answer choices We should take into account...

Which of the following statements is incorrect?

Group of answer choices

We should take into account of opportunity costs.

Only incremental cash flows are relevant to the accept/reject decision.

Capital budgeting decisions is based on accounting earnings.

Sunk costs should never be considered.

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Answer #1

Answer: Capital budgeting decisions is based on accounting earnings.

Statement 1 is correct. We should take into account of opportunity costs. This is the loss of profit that the company would incur due to accepting or rejecting a particular project.

Statement 2 is correct. Only incremental cash flows are relevant to the accept/reject decision. Changes (increases or decreases) due to acceptance or rejection of a project should be considered only as part of capital budgeting decision.

Statement 4 is correct. Sunk costs would be incurred no matter whether you accept or reject the project.

Statement 3 is incorrect. Capital budgeting is based on cash flows and not on accounting earnings.

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