FIN 325 EXAM 3 CH 10

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

$1,200 paid to repair a machine last year

Eglon Mills has a new Year 2020 project with an initial equipment cost of $368,000 and a project life of 10 years. The firm generally uses straight-line depreciation to a zero book value over the project's life. If the firm opts instead to use the bonus depreciation method, what is the depreciation tax shield amount for Year 2020 at a tax rate of 21 percent?

$77,280

Which one of the following would make a mutually exclusive project unacceptable?

An equivalent annual cost that exceeds that of an alternative project

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision?

Equivalent annual cost

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Hiring additional employees to handle the increased workload should the firm accept the wreath project

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

The operating cash flow for a project should exclude which one of the following?

Interest expense

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?

Tax due on the current salvage value of that asset

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

accepted because the profitability index is greater than 1.

The depreciation tax shield is best defined as the:

amount of tax that is saved because of the depreciation expense.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows

The bottom-up approach to computing the operating cash flow applies only when:

the interest expense is equal to zero.