Chapter 10: making capital investment decisions

OCF is calculated as net income plus depreciation using the _____ approach.

bottom-up

Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in ______________ are overlooked.

net working capital

The difference between a firm's current assets and its current liabilities is known as the _____.

net working capital

The _________ curse says that the lowest bidder is the one who underbid the most.

winner

The bonus depreciation in 2019 was _____ percent.

100

The rules for depreciating assets for tax purposes are based upon provisions in the ___.

1986 Tax Reform Act

According to the 2017 Tax Cuts and Jobs Act, bonus depreciation is phased out after _____.

2026

accelerated cost recover systems (ACRS)

A depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications

he following correctly describes the relationship between depreciation, income, taxes, and investment cash flows?

As depreciation expense increases, net income and taxes will decrease, while cash flows will increase.

With cost-cutting proposals, when costs decrease, operating cash flows (decrease/increase).

Blank 1: increase

the following are considered relevant cash flows

Cash flows from erosion effects Cash flows from opportunity costs Cash flows from beneficial spillover effects

While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital?

It is expected to be recovered by the end of the project's life.

Once cash flows have been estimated, which of the following investment criteria can be applied to them?

NPV IRR payback period

the three main sources of cash flows over the life of a typical project.

Net cash flows from sales and expenses over the life of the project. Cash outflows from investment in plant and equipment at the inception of the project Net cash flows from salvage value at the end of the project

When evaluating cost-cutting proposals, how are operating cash flows affected?

There is an additional depreciation deduction. The decrease in costs increases operating income.

the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?

There will be tax savings if the book value exceeds the sales price. Taxes are based on the difference between the book value and the sales price. Book value represents the purchase price minus the accumulated depreciation.

True or false: Cash flows should always be considered on an aftertax basis.

True

Operating cash flow is a function of _____.

earnings before interest and taxes depreciation taxes

To prepare _____ financial statements, we need estimates of quantities such as unit sales, the selling price per unit, the variable cost per unit, and total fixed costs.

pro forma

Opportunity costs are classified as ______ costs in project analysis.

relevant

the following are fixed costs?

rent on a production facility cost of equipment

eriosion

the cash flows of a new project that come at the expense of a firm's existing projects

The tax saving that results from the depreciation deduction is called the depreciation tax _____________

Blank 1: shield

Erosion will ______ the sales of existing products.

Reduce Reason: Erosion will reduce the sales of existing products, resulting in reduction in the cash inflow attributable to the new product.

the following is an example of an opportunity cost?

Rental income likely to be lost by using a vacant building for an upcoming project

the following is an example of a sunk cost?

Test marketing expenses

stand-alone principle

The assumption that evaluation of a project may be based on the project's incremental cash flows

incremental cash flows

The difference between a firm's future cash flows with a project and those without the project

Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?

The operating cash flows from net sales over the life of the project

When an asset is sold, there will be a tax savings if the _________value exceeds the sales price.

book

op-down approach, OCF

calculated by subtracting costs and taxes from Sales

Incremental

cash flows come about as a direct consequence of taking a project under consideration.

Investment in net working capital arises when ___.

cash is kept for unexpected expenditures credit sales are made inventory is purchased

When developing cash flows for capital budgeting, it is _____ to overlook important items.

easy

the ___________ step is to determine whether cash flows are relevant.

first

Interest expenses incurred on debt financing are ______ when computing cash flows from a project.

ignored Reason: When estimating cash flows from a project, we are only concerned with flows that result from the assets of the project. How we paid for those assets is not relevant.

An increase in depreciation expense will ____ cash flows from operations.

increase

If the tax rate increases, the value of the depreciation tax shield will ______.

increase Reason: If the tax rate increases, the value of the depreciation tax shield will increase; the relationship is multiplicative.

The computation of equivalent annual costs is useful when comparing projects with unequal _____.

lives

When a firm finances new investments, it may set up accounts payable with suppliers, but the balance that the firm must supply is called the investment in net ______________ capital

working

The computation of equivalent annual costs is useful when comparing projects with _____ lives.

unequal

Korporate Classics Corporation (KCC) won a bid to supply widgets to Pacer Corporation but lost money on the deal because they underbid the project. KCC fell victim to the _____.

winner's curse

When analyzing a proposed investment, we ______ (will/won't) include interest paid or any other financing costs.

wont

According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."

stand-alone

True or false: A sunk cost is an example of a relevant incremental cash flow.

False

a pro _________ financial statement projects future years' operations.

Forma

equation for estimating operating cash flows using the tax shield approach?

OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate

sunk cost

a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision

A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____.

should be accepted if there is no capital rationing constraint

opportunity cost

the most desirable alternative given up as the result of a decision