Which Statement is Most Correct?

A

Sunk costs should be ignored. The other statements are false.

The correct answer is B. None of these answers are correct.

Capital budgeting refers to the process of evaluating and selecting long-term investment projects that involve significant capital outlays. It is an important decision-making process for businesses and involves assessing the cash flows associated with investment opportunities.

Let's analyze each statement:

A. Sunk costs should be ignored in capital budgeting. This statement is incorrect. Sunk costs are costs that have already been incurred and cannot be recovered. In capital budgeting, sunk costs should be ignored because they are irrelevant to the decision-making process. The focus should be on future costs and cash flows rather than past expenses.

C. Externalities should be ignored in capital budgeting. This statement is incorrect. Externalities refer to the costs or benefits that are not reflected in the cash flows of the investment project but are borne by society or third parties. While externalities may not directly impact the cash flows of the project, they can have significant economic and social consequences. Therefore, externalities should be considered in capital budgeting to account for their potential impact on the project's overall value.

E. Opportunity costs should be ignored in capital budgeting. This statement is incorrect. Opportunity cost refers to the value of the next best alternative foregone when making a decision. Ignoring opportunity costs can lead to suboptimal decision-making. In capital budgeting, it is crucial to consider opportunity costs as they represent the potential benefits that could have been obtained from alternative investment opportunities.

D. All of these answers are correct. This statement is incorrect because statements A, C, and E are individually incorrect, as explained above.

Based on the analysis, we conclude that the most correct statement is B. None of these answers are correct. Sunk costs should be ignored, externalities should be considered, and opportunity costs should also be taken into account in the capital budgeting process.