A company is considering a proposed new plant that would increase productive capacity. Which of the following statements is correct?
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When estimating the project’s operating cash flows, it is important to include any sunk costs, but the firm should ignore opportunity costs and cash flow effects of externalities since they are accounted for in the discounting process.
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Since depreciation is a noncash expense, the firm does not need to deal with depreciation when calculating the operating cash flows.
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In calculating the project’s operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC. If interest were deducted when identifying relevant cash flows, it would in effect be “double-counted.”
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The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.
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