Which of the following is not true capital budgeting?Incremental cash flows are consideredOpportunity costs are excludedRelevant cash flows are consideredSunk costs are ignored (2024)

FAQs

Which of the following is not true about capital budgeting? ›

It includes opportunity cost, actual cost, incremental and relevant cash flows. It does not include sunk costs.

Conversely, non-cash expenses like depreciation are not included in capital budgeting (except to the extent they impact tax calculations for "after tax" cash flows) because they are not cash transactions.

Costs for routine maintenance work necessary to keep a facility or asset in useful condition are not typically included in the capital budget.

Capital Budgeting is the process of planning the investment in long-term assets. Payback method ignores the time value of money. IRR and NPV consider time value of money. Return on Assets is not a Capital Budgeting method.

Key Takeaways. Capital budgeting is used by companies to evaluate major projects and investments, such as new plants or equipment. The process involves analyzing a project's cash inflows and outflows to determine whether the expected return meets a set benchmark.

Answer and Explanation:

However, the cash flow from accumulated depreciation is not relevant. This is because the balance in the accumulated depreciation account is the cost of the asset that has already been written off. Since this is a sunk cost, it is not relevant for capital budgeting decisions.

There are four types of capital budgeting: the payback period, the internal rate of return analysis, the net present value, and the avoidance analysis. The choice of which of these four to use is based on the priorities and goals of the company.

Capital budgeting is the process of evaluating the best way to invest money in long-term projects that increase the value of a business, such as purchasing machinery, building facilities or investing in new product development.

Stocks and bonds. The physical plants, equipment and machinery are examples of capital as they are used to manufacture goods or products for customers. On the other hand, stocks and bonds are investments which may yield returns to the investor but they are not capital as they cannot facilitate manufacturing of goods.

Capital budgeting methods include Net Present Value, Accounting Rate of Return, Internal Rate of Return, Discounted Payback Period, Payback Period, Profitability Index.

Which of the following is followed in capital budgeting? ›

The correct answer is Money as capital form. In Capital Budgeting, money is used as a capital form. It is also known as investment appraisal. It is an accounting principle using which companies decide whether to invest in a particular project or not.

The payback period (PB), internal rate of return (IRR) and net present value (NPV) methods are the most common approaches to project selection. Although an ideal capital budgeting solution is such that all three metrics will indicate the same decision, these approaches will often produce contradictory results.