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Relevant cash flows Answer: d Diff: E . Which of the following statements is most correct?

a. The rate of depreciation will often affect operating cash flows, even though depreciation is not a cash expense.
b. Corporations should fully account for sunk costs when making investment decisions.
c. Corporations should fully account for opportunity costs when making investment decisions.
d. Statements a and c are correct.
e. All of the statements above are correct.

Relevant cash flows Answer: c Diff: E . A company is considering a new project. The company’s CFO plans to calculate the project’s NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the company’s cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?

a. Any sunk costs associated with the project.
b. Any interest expenses associated with the project.
c. Any opportunity costs associated with the project.
d. Statements b and c are correct.
e. All of the statements above are correct.

Relevant cash flows Answer: d Diff: E . When evaluating potential projects, which of the following factors should be incorporated as part of a project’s estimated cash flows?

a. Any sunk costs that were incurred in the past prior to considering the proposed project.
b. Any opportunity costs that are incurred if the project is undertaken.
c. Any externalities (both positive and negative) that are incurred if the project is undertaken.
d. Statements b and c are correct.
e. All of the statements above are correct.

Relevant cash flows Answer: b Diff: E . Which of the following statements is most correct?

a. When evaluating corporate projects it is important to include all sunk costs in the estimated cash flows.
b. When evaluating corporate projects it is important to include all relevant externalities in the estimated cash flows.
c.