FIN 357 Chapter 10

A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____. 1. should be accepted if there is no capital rationing constraint 2. the firm should only accepted if the project has a high payback period 3. it will never cost the firm more than calculated in the cash flow analysis

1. should be accepted if there is no capital rationing constraint

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

Incremental

What is the equation for estimating operating cash flows using the top-down approach?

OCF = Sales - Costs - Taxes

Which of the following is an example of a sunk cost? 1. Salvage value of equipment 2. Test marketing expenses 3. Cost of new equipment 4. Bonus to top management

Test marketing expenses

Cash flows should always be considered on a(n) ___________ basis. Multiple choice question.

aftertax

Opportunity costs are ____.

benefits lost due to taking on a particular project

Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration.

direct

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

ignored

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

lives

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

net working capital

Erosion will ______ the sales of existing products.

reduce

The first step in estimating cash flow is to determine the _________ cash flows.

relevant

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

Using the top-down approach, OCF is calculated by subtracting costs and ____ from sales.

taxes

True or false: When developing cash flows for capital budgeting, it is easy to overlook important items.

true

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

won't

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

1. IRR 2. payback period 3. NPV

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

1. The decrease in costs increases operating income. 2. There is an additional depreciation deduction.

Investment in net working capital arises when ___.

1. cash is kept for unexpected expenditures 2. inventory is purchased 3. credit sales are made

Which of the following are fixed costs?

1. rent on a production facility 2. cost of equipment

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

increase

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

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

increase