US CMA Part 2 · Chapter 8 · Question 1 of 15
Which of the following cash flows should be EXCLUDED when evaluating a proposed capital project?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Interest payments on debt used to finance the project
Explanation
Financing costs are excluded from project cash flows because the cost of financing is captured in the discount rate; including interest as well would double count it. Salvage value, working capital investment and the erosion (cannibalization) of existing sales are all relevant incremental cash flows.
More Capital investment decisions MCQs
- Q3A project will increase annual revenue by $300,000 and cash operating costs by $120,000. Annual tax depreciation is $100,000 and the tax…
- Q4A company records annual tax depreciation of $100,000 on new equipment and its tax rate is 25%. What is the annual depreciation tax shield?
- Q5Rowan Dental invests $500,000 in equipment expected to generate after-tax cash inflows of $120,000, $150,000, $180,000 and $200,000 in…
- Q6Sefton Labs is evaluating a $600,000 investment that will generate after-tax cash inflows of $170,000 per year for 5 years with no salvage…
- Q7For the Sefton Labs project (initial investment $600,000, present value of future cash inflows $644,436), what is the profitability index?