Question

Which of the following statements is most correct?

Question 5 options:

• Sunk costs should be incorporated into capital budgeting decisions.

• Opportunity costs should be incorporated into capital budgeting decisions.

• Relevant externalities should be incorporated into capital budgeting decisions.

• The rate of depreciation will not affect after-tax operating cash flows, since depreciation is not a cash expense.

• Answers b and c are correct.

Answer 1

Q) B) Opportunity costs should be incorporated into capital budgeting decisions.

C) Relevant externalities should be incorporated into capital budgeting decisions.

Explanation:

Option A is incorrect, because sunk costs are costs which have already been incurred before the project and cannot be avoided whether the project is accepted or rejected , so it should not be taken into consideration.

Option D is incorrect, because higher the rate of depreciation lesser will be the taxable amount and lesser will be the tax. This will increase the after tax operating cash flow because depreciation is added back to net profit. The second part of statement is correct as depreciation is a non cash expense.