17. Which of the following is true regarding externalities? ____ A) If a project

Question

17. Which of the following is true regarding externalities?
____
A) If a project can create employment in a depressed region, firm should include such an externality in its NPV calculations
B) If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward
C) An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality
D) Sometimes analysts think that an externality is present in a project, but they recognize that the particular externality cannot be quantified with any precision – estimates of its effect would really just be guesses. In such a situation, the externality should be ignored, i.e. not considered at all, because if it were considered it would make the analysis appear more precise than it actually is
E) None of the above

Explanation / Answer

C) An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality

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