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NPV

Which of the following statements is correct?

a. In a capital budgeting analysis where part of the funds used to finance the project are raised as debt, failure to include interest expense as a cost in the cash flow statement when determining the project's cash flows will lead to an upward bias in the NPV.
b. The preceding statement would be true if "upward" were replaced with "downward."
c. The existence of "externalities" reduces the NPV to a level below the value that would exist in the absence of externalities.
d. If one of the assets that would be used by a potential project is already owned by the firm, and if that asset could be leased to another firm if the project is not undertaken, then the net rent that could be obtained should be charged as a cost to the project under consideration.
e. The rent referred to in statement d is a sunk cost, and as such it should be ignored.

Solution Preview

a. In a capital budgeting analysis where part of the funds used to finance the project are raised as debt, failure to include interest expense as a cost in the cash flow statement when determining the project's cash flows will lead to an upward bias in the NPV.

Interest is accounted for in the discount ...

Solution Summary

The solution explains the correct statement among the given statements relating to NPV

$2.19