Which of the following statements best describes the rules of cash flow analysis

Question

Which of the following statements best describes the rules of cash flow analysis?

Question 15 options:

With reagard to the final result, add back depreciation method is different from the depreciation tax-shield method

a) We should include the opportunity cost but not allocated costs or overhead b) We should consider the sunk cost but not the financing cost c)

With reagard to the final result, add back depreciation method is different from the depreciation tax-shield method

d) None of the above.

Explanation / Answer

Option A is Correct.

Oppotunity cost should be included as the value is lost in case the resource is used in another project. Whereas allocated costs or overheads are not allocated as they are not usually associated to a single project but are part of many different projects of a company.

Sunk cost is not included as it is the cost which would be incurred irrespective of the decision to go ahead with a project or not go with it

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