CFA® Level 1: CFA® Level 1 Exam | Test Prep

Which of the following statements is most correct?

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A. When equipment is sold, companies receive a tax credit as long as the salvage value is less than the initial cost of the equipment.

B. None of the answers are correct.

C. In estimating net cash flows for the purpose of capital budgeting, interest and dividend payments should not be included since the effects of these items are already included in the weighted average cost of capital.

D. Capital budgeting analysis for expansion and replacement projects is essentially the same because the types of cash flows involved are the same.

E. All of the answers are correct.

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Explanations

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A. B. C. D. E.

Interest payments should not be included in the estimated cash flows because the effects of debt financing are reflected in the cost of capital used to discount the cash flows. If interest was subtracted from the cash flows, and then the remaining cash flows were discounted, the cost of debt would be double-counted.

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