The correct answer is: B. Cost of capital is equal to minimum required return.
Capital budgeting is the process of planning and evaluating long-term investments. It involves identifying, analyzing, and selecting investment projects that will help a company achieve its goals. The cost of capital is the rate of return that a company must earn on its investments in order to satisfy its investors. The minimum required return is the rate of return that a company must earn on its investments in order to break even.
The cost of capital is not equal to the minimum required return because the cost of capital includes a risk premium. The risk premium is the additional return that investors demand for taking on risk. The minimum required return does not include a risk premium because it is the rate of return that a company must earn on its investments in order to break even.
Here is a brief explanation of each option:
- A. Capital budgeting is related to asset replacement decisions. This is true because capital budgeting is the process of planning and evaluating long-term investments, which includes asset replacement decisions.
- B. Cost of capital is equal to minimum required return. This is not true because the cost of capital includes a risk premium, while the minimum required return does not.
- C. Existing investment in a project is not treated as sunk cost. This is true because sunk costs are costs that have already been incurred and cannot be recovered. Existing investment in a project is not a sunk cost because it can be recovered if the project is not successful.
- D. Timing of cash flows is relevant. This is true because the timing of cash flows affects the present value of a project. A project with earlier cash flows is worth more than a project with later cash flows.