The correct answer is: C. All accrued costs and revenues be incorporated.
Capital budgeting is the process of planning and evaluating long-term investments. It involves identifying, analyzing, and selecting investments that will help a company achieve its long-term goals.
One of the key principles of capital budgeting is that cash flows should be calculated in incremental terms. This means that only the cash flows that are directly attributable to the investment should be considered. For example, if a company is considering investing in a new machine, the cash flows that should be considered would include the cost of the machine, the savings from increased production, and the cost of maintenance and repairs.
Another key principle of capital budgeting is that all costs and benefits should be measured on a cash basis. This means that only the actual cash flows that will occur should be considered. For example, if a company is considering investing in a new machine, the cash flows that should be considered would not include the depreciation of the machine. Depreciation is an accounting concept that does not represent an actual cash flow.
Finally, all benefits should be measured on an after-tax basis. This means that the cash flows should be adjusted for the tax effects of the investment. For example, if a company is considering investing in a new machine, the cash flows that should be considered would include the after-tax savings from increased production.
Option C, “All accrued costs and revenues be incorporated,” is not applied in capital budgeting because accrued costs and revenues are not actual cash flows. Accrued costs are costs that have been incurred but not yet paid, while accrued revenues are revenues that have been earned but not yet received. Both of these items represent future cash flows, which are not considered in capital budgeting.