Chapter 12 Vocab Finance 3000

This is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life

product life cycle

. Accelerated depreciation allows firms to

receive more of the dollars of depreciation earlier in the asset's life.

When looking at these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life.

replacement

Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as

substitutionary effects

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a

sunk cost

An asset's cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees is referred to as the ___________________.

. Depreciable basis

. ABC Engineering just purchased a new machine. All of the following are examples of incremental cash flows except _______________.

. Developmental costs to determine which machine would best work with their unique process

. ABC Engineering just bought a new machine. All of the following are examples of incremental cash flows except _______________.

. Interest expense on the loan used to purchase the machine

. The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as the _________________.

. Pro forma analysis

AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of a(n) _______________.

. Sunk cost

All of the following can be included in the depreciable basis of an asset except _______.

. Variable costs

A decrease in net working capital (NWC) is treated as a

. cash inflow

. This is used as a measure of the total amount of available cash flow from a project

. free cash flow

This is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period

. half-year convention

With regard to depreciation, the time value of money concept tells us that

. taking the depreciation expense sooner is always better.

Which of the following statements is correct?

A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things

Which of the following statements is correct with respect to Section 179 deductions?

All of these are correct statements

To correctly project cash flows, we need to consider all of the factors except _____.

All of these are factors that need to be considered.

Which of the following is NOT included when calculating the depreciable basis for real property?

financing fees

The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year. They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products. This is an example of ___________.

Complementary effect

When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following?

EBIT - Taxes + Depreciation

The best approach to convert an infinite series of asset purchases into a perpetuity is known as the

Equivalent annual cost approach

Section 179 allows a business, with certain restrictions, to do which of the following?

Expense the asset immediately in the year of purchase

. All of the following are incremental cash flows attributable to the project except _____

Financing costs

A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications which has a monthly cost of $50 per month. This is an example of _____________.

Incremental cash flow

Which of the following statements is correct

None of these statements is correct.

One way to account for flotation costs of raising capital is to

adjust the project's initial cash flow so that it will reflect the flotation costs.

This is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements.

Pro forma analysis

A local bank is contemplating opening a new branch bank in a large superstore across town from their main office. It is estimated that the new branch will generate $20,000 after expenses each month. The manager wonders if all these revenues should be considered an incremental cash flow. Given this information, which of the following statements is correct?

Some amount less than the $20,000 is incremental because of substitutionary effects.

Coke is planning on marketing a new drink called Very Berry Coke which is a mixture of raspberry and blackberry flavors blended to perfection and added to the highly secret Coca-Cola formula. This new product is expected to reduce the sales of their existing product, Cherry Coke, by $10 million dollars per year. This is an example of a _______________.

Substitutionary effect

. If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n) ________________.

Sunk cost

Due to rapid growth, a computer superstore is contemplating expanding by adding another location. Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion?

The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner.

A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct?

The lot is an incremental cash flow because it represents an opportunity cost

1. As new capital budgeting projects arise, we must estimate

When such projects will require cash flows.

. For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity?

choosing between alternative assets with differing lives

Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as

complementary effects.

Concerning incremental project cash flow, this is a cost one would never count as an expense of the project.

financing costs