ECONOMICS

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COST ACCOUNTING

CAPITAL BUDGETING

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
The following is NOT a principle to consider when calculating cash flows for NPV & IRR
A
The final cash flows must be after-tax
B
Include all opportunity costs
C
Ignore allocated costs
D
Include accounting entries e.g. depreciation
Explanation: 

Detailed explanation-1: -Note: As mentioned earlier, financing costs such as interest payments and dividends should NOT be included as part of the incremental cash flows in the calculation of the NPV of the project.

Detailed explanation-2: -Answer and Explanation: The correct option is (c) past cash outflows. Past cash outflows wouldn’t be considered by the company when they using the net present value method for determining the profitable project. It considers present cash flows to calculate the current value of future cash flows.

Detailed explanation-3: -The depreciation taken on the asset in future periods is not a cash flow and is not included in the NPV and IRR calculations. However, there is a cash benefit related to depreciation (often called a depreciation tax shield) since income taxes paid are reduced as a result of recording depreciation expense.

Detailed explanation-4: -NPV ignores sunk costs. Answer.

There is 1 question to complete.
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