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Homework answers / question archive / Which two of the following five statements are correct? Select two alternatives: When evaluating a capital budgeting decision, we generally include interest expense
Which two of the following five statements are correct?
Select two alternatives:
Statement 2 and 4 is correct
Explanations:
Statement 1 is False because in theOperating cash flows interest expense is not included thus it does not affect the capital budgeting decisions.
Statement 2 is True because the Net working capital is The difference between the Current assets and the current liabilities and if there is increase then in net working capital then we can infer that excess cash is used which reduvces the free cash flow from the project.
Statement 3 is False Because in Scenario analysis all the parameter is changed and then the result is analysed while in senstivity analysis only one parameter is changed.
Statement 4 is True because in capital budgeting the most difficult part is to analyse cost of capital which is the return that companies need to pay for financing capital , these are based on various assumptions and market risk.
Statement 5 is False because the sunk cost is the cost that is incurred and can not be recovered and if it is going to be the part of new project then it is certain that the cost will be recovered, therefore it is not a sunk cost.
