Which one of the following statements is correct? The depreciation tax shield cr

Question

Which one of the following statements is correct? The depreciation tax shield creates a cash outflow for a project. Interest expense should always be included as a cash outlow when analyzing a project. Project analysis should only include the cash flows that affect the income statement. A project can create a positive operating cash flow without affecting sales. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project

Explanation / Answer

For any organization the cash flow statement briefs about the inflows and outflows for the stipulated timeframe. This plays an important role for any business performance. Operating cash flow is calculated by following the several rounds of adjustment to the Net Income. Thus, Operating cash flow is the measure which shows profits and serves as the check for the earnings. Operating cash flow comes from the net income and any changes for the working capital, without affecting the sales. Also, for a project the net cash flow is completely unlike the accounted income. For an instance, cannibalization happens as a new project complements the old existing project, the cash flow increases due to the addition of the new project.

Hence, the answer is ‘A project can create a positive operating cash flow without affecting sales’.

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