The correct answer is: B. Cost of capital is equal to minimum required rate of return
Capital budgeting is the process of planning and managing a company’s long-term investments. It involves identifying, evaluating, and selecting investment projects that will help the company achieve its strategic goals.
The cost of capital is the rate of return that a company must earn on its investments in order to satisfy its investors. It is a measure of the riskiness of a company’s investments and is used to discount future cash flows to their present value.
The minimum required rate of return is the rate of return that a company must earn on its investments in order to break even. It is a measure of the opportunity cost of capital and is used to calculate the net present value of a project.
The cost of capital is not equal to the minimum required rate of return because the cost of capital is a measure of risk, while the minimum required rate of return is a measure of opportunity cost. A company may be willing to accept a lower return on an investment that is less risky, even if it means that the project will not break even.
In addition, the cost of capital is a weighted average of the costs of different types of capital, such as debt and equity. The minimum required rate of return is a single rate that is used to evaluate all projects.
Therefore, the correct answer is: B. Cost of capital is equal to minimum required rate of return
Here is a brief explanation of each option:
- Option A: Capital budgeting is related to asset replacement decisions. This is true. Capital budgeting is used to evaluate whether or not to replace existing assets with new ones.
- Option B: Cost of capital is equal to minimum required rate of return. This is false. The cost of capital is a measure of risk, while the minimum required rate of return is a measure of opportunity cost. A company may be willing to accept a lower return on an investment that is less risky, even if it means that the project will not break even.
- Option C: Timing of cash flows is relevant. This is true. The timing of cash flows is important because it affects the present value of the cash flows.
- Option D: Existing investment in a project is not treated as sunk cost. This is true. Sunk costs are costs that have already been incurred and cannot be recovered. Existing investment in a project is not considered a sunk cost because it can be recovered if the project is abandoned.