Chapter 8

The cash flows of a new project that come at the expense of a firm's existing projects are called: -opportunity costs. -net working capital expenses. -erosion costs. -salvage value expenses. -sunk costs.

erosion costs.

Which one of these statements is correct? -Operating cash flow is equal to net income plus depreciation plus taxes. -Sunk costs should be included in the initial cost of a project. -Synergy occurs when a new product reduces the sales of a current product. -The cost of test marketing a product prior to deciding whether or not to produce the product is a sunk cost. -Real cash flows must be discounted at the nominal rate.

The cost of test marketing a product prior to deciding whether or not to produce the product is a sunk cost.

Bloomfield's has some equipment sitting idle in a warehouse. The equipment is fully paid for and also fully depreciated. If the firm decides to use this equipment for a new project, what cost, if any, should the firm include in its startup costs for the project? -There is no cost to the project for this equipment. -The original purchase price of the equipment should be included in the startup costs. -The original purchase price minus any tax savings realized to date on the depreciation should be included in the startup costs. -The current market value of the equipment should be included in the startup costs. -The annual storage cost for the equipment should be included as a cash inflow in the startup costs.

The current market value of the equipment should be included in the startup costs.

Which one of these statements related to depreciation is correct for a firm with taxable income of $121,600 and aftertax income of $74,200? -Depreciation increases the net book value of the firm's assets. -Depreciation in a non-cash expense that increases the firm's cash flows. -Depreciation lowers the firm's net income but does not affect its cash flows. -Depreciation has no effect on either the firm's net income or its cash flows. -Depreciation decreases both the firm's net income and its cash flows.

Which one of these statements related to depreciation is correct for a firm with taxable income of $121,600 and aftertax income of $74,200?

A project that will improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n) _____ project. -sunk cost -opportunity cost -cost-cutting -revenue-cutting -revenue-generating

cost-cutting

The incremental cash flows of a project are best defined as: -The cash received from the additional sales generated by the project. -Any change in a firm's cash flows resulting from the addition of the project including opportunity costs. -The cash received or lost from changes in -The sales of a firm's current products as a result of adding the project. -The increase or decrease in a firm's cash flows resulting from adding the project, excluding all sunk and opportunity costs. -The total cash flows of a firm once the new project is completely integrated into the firm's operations.

Any change in a firm's cash flows resulting from the addition of the project including opportunity costs.

Which one of these statements related to depreciation is correct for a firm with taxable income of $121,600 and aftertax income of $74,200? -Depreciation increases the net book value of the firm's assets. -Depreciation in a non-cash expense that increases the firm's cash flows. -Depreciation lowers the firm's net income but does not affect its cash flows. -Depreciation has no effect on either the firm's net income or its cash flows. -Depreciation decreases both the firm's net income and its cash flows.

Depreciation in a non-cash expense that increases the firm's cash flows.

In project analysis, which one of these is a common assumption regarding net working capital? -Only changes in current assets are included in net working capital for project analysis purposes. -The aftertax salvage value of an asset that is sold is included as a net working capital item. -Net working capital will be returned to its pre-project level at the end of a project. -Increases in net working capital will be treated as a cash inflow. -Any change in net working capital will only occur when a project commences.

Net working capital will be returned to its pre-project level at the end of a project.

Global Enterprises has spent $134,000 on research developing a new type of shoe. For this shoe to now be manufactured, the firm will need to expand into an empty building that it currently owns. The firm was offered $229,000 last week for that building. An additional $342, 000 will be required for new equipment and building improvements. Labor and material costs are estimated at $4.98 per pair of shoes. Interest expense on the loan needed to finance the production of this new shoe will be $17,800 a year. Which one of these correctly identifies the sunk costs? -$229,000 value of the building -$134,000 for research -$229,000 value of the building plus -$342,000 for new equipment and improvements -$17,800 for interest plus $134,000 for research -$229,000 for the building plus $134,000 for research

-$134,000 for research

Which one of the following will decrease a firm's net working capital? -A decrease in fixed assets -An increase in inventory -An increase in the firm's checking account balance -A decrease in accounts payable -A decrease in accounts receivable

A decrease in accounts receivable

You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.

Sunk