Chapter 8 Learn Smart

What is the equation for determining the real interest rate?

((1+ Nominal Interest Rate)/(1+Inflation Rate))-1

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

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

Assets in the five-years MACRS class are depreciated over _____ years

6

Which of the following is given greater importance in capital budgeting problems in corporate finance?

Cash Flows

Firms generally maintain two sets of books, one for the IRS and the other for the purposes of generating financial statements according to the _______

FASB

True or False: Opportunity costs can be ignored when determining the financial feasibility of a project?

False

The shareholders' books follow the rules of the ______

Financial Accounting Standards Board (FASB)

Investment in net working capital arises when _______

Inventory is purchased Credit sales are made Cash is kept for unexpected expenditures

Which of the following is (are) true about allocated costs?

These costs benefit more than on project These costs are allocated to more than one project

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

ignored

The net present value technique does not discount earnings because earnings

do not represent real money

Side effects from investing in a project refer to cash flows from__________

erosion effects synergy effects

Interest on a municipal bond is _____

ignored for tax purposes but included as income for FASB accounting

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

increase

If the inflation rate increases, the nominal rate of interest will ____

increase

Allocated costs must be treated as relevant of incremental costs _____

only if the costs being allocated are affected by the proposed project

Erosion will _______ the sales of existing products

reduce

What is net working capital?

Current assets - Current Liabilities

As a general rule, when estimating equivalent annual costs, ______ cash flows should be used.

Real

Which of the following is an example of an opportunity cost?

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

What are the two sets of accounting books?

Tax books Shareholders' books

When analyzing a project, sunk cost ______ incremental cash flows

are not

The equivalent annual cost method for deciding between two machines applies only if _____

both machines will be replaced

A firm should replace a current machine when the annual cost of new machine is ____ than the annual cost of the current machine.

less

Which of the following is an example of a sunk cost?

Test Marketing Expenses

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

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

True or False. NPV will be same regardless of whether nominal or cash flows are used.

True. As long as nominal cash flows are discounted at the nominal rate and real cash flows are discounted at the real rate, the NPV will be the same.

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

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

What is the difference between nominal cash flow and real cash flow?

Nominal cash flow refers to the actual dollars to be received while real cash flow refers to the cash flow's purchasing power.

Incremental cash flows are changes in a firm's cash flows that occur as a direct consequence of _________.

accepting a project

Incremental cash flows are changes in a firm's cash flows that occur as a direct consequence of __________

accepting a project

Opportunity costs are ________

benefits lost due to taking on a particular on a particular project

Allocated costs arise when a specific expenditure ________

benefits more than one project or division