Question

Externalities in capital budgeting projects are difficult to quantify and should never be included in financial...

Externalities in capital budgeting projects are difficult to quantify and should never be included in financial analyses.

a. True b. False

A critical rule in capital budgeting and financial analysis of projects is that decisions must be based on incremental cash flows.

a. True

b. False

A firm’s equity beta is determined by the market and does not reflect business risk.

a. True

b. False

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Homework Answers

Answer #1

Question 1

Externalities are the effects the acceptance of a project may have on other firms' cash flow or on the company itself. For ex one negative example of externalities is cannibalization.

In cases of externalities, value of lost cash inflows should be taken into consideration.

Hence, the statement is false.

Question 2

Incremental cash flows are the relevant cash flows to be considered as part of the cash flows under capital budgeting process.

Hence, the statement is true

Question 3

Beta reflects the market risk which is also known as the Unsystematic risk which includes liquidity risk, interest rate risk etc and not includes business risks

Hence, the statement is true.

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