If a project does not break even on a cash flow basis, which of the following options should be chosen?

• A. Delay the project until net sales increase, regardless of cash flow.
• B. Reject the project, as it does not generate sufficient net sales to cover its costs.
• C. Proceed with the project if it has high gross sales, even if cash flow is negative.
• D. Accept the project, since net sales are always positive.

Answer: (B)

Verified step by step guidance

1. Understand the concept of break-even analysis: Break-even analysis determines the point at which total revenues equal total costs, meaning there is no profit or loss. For a project to be viable, it must at least break even on a cash flow basis, ensuring that inflows cover outflows.
2. Evaluate the importance of cash flow: Cash flow is critical for the sustainability of a project. Negative cash flow indicates that the project is not generating enough liquidity to cover its operational costs, which can lead to financial difficulties.
3. Analyze the options provided: Each option should be assessed based on its alignment with financial principles. For example, delaying the project until net sales increase does not address the cash flow issue directly, and accepting a project with negative cash flow is generally not advisable.
4. Consider the correct approach: Rejecting the project is the most prudent decision if it does not generate sufficient net sales to cover its costs and fails to break even on a cash flow basis. This ensures that resources are allocated to projects with better financial viability.
5. Conclude with the rationale: The correct choice is to reject the project because financial accounting principles prioritize projects that generate positive cash flow and cover their costs. Negative cash flow can lead to unsustainable operations and financial losses.