Fin.3320 Ch.10

Once cash flows have been estimated, which of the following investment criteria can be applied to them? I. Payback period II. YTM III. the constant growth dividend discount model IV. IRR V. NPV A. I,II,III,IV,V B. III,IV,V C. IV,V D.I,II,III E. I,III,IV

E. I,III,IV

Operating cash flow =

EBIT + depreciation - taxes

opportunity cost

The most valuable alternative that is given up if a particular investment is undertaken.

Equivalent Annual Costs (EAC)

The present value of a project's costs calculated on an annual basis.

cash costs equal

costs less the increase in accounts payable

Project Cash flow =

project operating cash flow - project change in networking capital - project capital spending

In general, cash income is

sales minus the increase in accounts receivable

The computation of equivalent annual costs is useful when comparing projects with unequal ____ A. Lives B. salvage values C. Annual cash flows D. Initial investments

A. Lives

Which of the following statements regarding the relationship between book value, sales, prices, and taxes are true when a firm sells a fixed asset? I. There will be a tax saving if the book value exceeds the sales price. II. Taxes are based on the difference between the book value and the sales price III. Book value represents the purchase prices - the accumulated depreciation IV. Taxes are based on the difference between the purchase price and the sales prices of the asset. A. I,II,III B. I,III,IV C. I,II D. I,IV

A. I,II,III

Interest expenses incurred on debt financing are _____ when computing cash flows from a project. A. Ignored B. Treated as cash outflows C. Treated as cash inflows D. Spread over the life of the project.

A. Ignored

Opportunity costs are classified as ____ costs in project analysis. A. Relevant B. Sunk C. Intangible D. Irrelevant

A. Relevant

Erosion will _____ the sales of existing products. A. Not affect B. Reduce C. Increase

B. Reduce

Which of the following are fixed costs? I. Inventory costs II. Net working capital III. Cost of equipment IV. Rent of a production facility A. I,II,III,IV B. II, III, IV C. I, II, D. III, IV

D. III, IV

If the tax rate increases, the value of the depreciation tax shield will ____ A. Increase B. not be affected C. Decrease

A. Increase If the tax rate increases, the value of the depreciation tax shield will increase; the relationship is multiplicative.

Accounts receivables and accounts payable are not an issue with project cash flow estimation unless changes in _____ are overlooked. A. Net working capital B. The cost of capital C. Investor sentiment D. Tax rates

A. Net working capital

The rules for depreciating assets for tax purposes are based upon provision in the _____ A. 1986 IRS Act B. 1986 SEC Act C. 1986 Tax Reform Act D. 1986 Sarbanes-Oxley Act

C. 1986 Tax Reform Act

Incremental Cash flows come about as a(n) _____ consequence of taking a project under consideration. A. Indirect B. Direct C. Sporadic

B. Direct

What is net working capital? A. CA + CL B. CL - CA C. CA-CL D. Total assets - Total liabilities

C. CA-CL

sunk cost

A cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision.

An increase in depreciation expense will ____ cash flow operations. A. not affect B. increase C. decrease

B. Increase An increase in depreciation expense will increase cash flows because it will decrease taxes paid.

According to the top-down approach, what is the operating cash flow is sales are $200,000, total cash costs are $190,636 and the tax bill is $1,144? A. $7,420 B. $8,680 C. $7,960 D. $8,220

D. $8,220

Sunk costs are costs that ____. A. Will not contribute to profits in the long run even if a project is accepted. B. Relate to other projects of the firm C. Cannot be measured. D. Have already occurred and are not affected by accepting or rejecting a project.

D. Have already occurred and are not affected by accepting or rejecting a project.

stand-alone principle

The assumption that evaluation of a project may be based on the project's incremental cash flows.

accelerated cost recovery system (ACRS)

A depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.

Which of the following are considered relevant cash flows? I. Cash flows from beneficial spillover effects II. Cash flows from erosion effects III. Cash flows from opportunity costs IV. Cash flows from sunk cost A. I,II,III & IV B. I,II,III C. II,III,IV D. I,III

B. I,II,III

Investment in net working capital arises when _____. I. Credit sales are made II. Cash is kept for unexpected expenditures III. Inventory is purchased. IV. Equipment is purchased. A. I,II,III & IV B. I,II,III C. II,III,IV, D. I,III,IV

B. I,II,III Equipment is categorized as a fixed asset; neither current assets nor current liabilities are affected by the purchase of equiptment

Palmer Cor. is choosing between server X and server Y to replace its current equipment. It has gathered the following information: Server X: Estimated life = 2 years ; NPV = -$143,261 Server Y: Estimated life = 3 years ; NPV = -$203,229 if Palmers required rate of return is 8%, what is the EAC of server X and Server y? A. Server X: -$71,630.50 Servery Y: -$67,763.00 B. Server X: -$80,336.36 Server Y: -$78,859.66

B. Server X: -$80,336.36 Server Y: -$78,859.66 The EAC for Server X is : -143261=PMT [1-(1/1.08^2) / .08] PMT = -$80,336.36 The EAC for Server Y is: -203229= PMT [1-(1/1.08^3) / .08] PMT= -$78,859.66

Operating cash flow is a function of: I. Initial investment in Equipment II. Taxes III. Depreciation IV. EBIT V. Salvage value of equipment A. I,II,III,IV,V B. III, IV, V C. II,III,IV D. III, IV

C. II,III,IV

Which one of the following is the equation for estimated operating cash flows using the tax shield approach? A. OCF - (Sales - Costs) + Deprecation X Tax rate B. (Sales - Costs) X Tax rate + Depreciation X (1 - Tax rate) C. OCF= (Sales - Costs) X ( 1- Tax rate) + Depreciation X Tax rate D. OCF= ( Sales - Costs) x (1-Tax rate) + Depreciation

C. OCF= (Sales - Costs) X ( 1- Tax rate) + Depreciation X Tax rate

When evaluating cost-cutting proposals, how are operating cash flows affected? I. The decrease in costs increases operating income II. There is an additional depreciation deduction III. Wages are always reduced in cost-cutting endeavors IV. The decrease in costs decreases operating income A. I,II,III,IV B. II,III,IV C. I,III,IV D. I,II

D. I,II Wages are not always reduced when costs are cut. A decrease in costs would increase net income.

Identify the three main sources of cash flows over the life of a typical project. I. Test marketing expenses that have been classified as sunk costs. II. Net cash flows from sales and expenses over the life of the project. III. Net cash flows from salvage value at the end of the project. IV. Cash outflows from investment in plant and equipment at the inception of the project. A. I,III,IV B. III,IV C. I,II,III D. II, III, IV

D. II, III, IV

Which of the following is an example of an opportunity cost? A. Sales revenue lost due to new competitors entering the market. B. Lowering taxes by increasing depreciation expenses. C. Money spent on advertising to take advantage of opportunities in the market. D. Rental income likely to be lost by using a vacant building for an upcoming project.

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

According to the ____ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm". A. Stand-with B. Walk-alone C. Stand-and-deliver D. Stand-alone

D. Stand-alone

pro forma financial statements

Financial statements projecting future years' operations

incremental cash flows

The difference between a firm's future cash flows with a project and those without the project.

The cash flows of a new project that come at the expense of a firm's existing projects

The cash flows of a new project that come at the expense of a firm's existing projects

erosion

The cash flows of a new project that come at the expense of a firm's existing projects.

Korporate Classic Corporation (KCC) won a bid to supply widgets to Pacer corporation but lost money on the deal because they underbid the project. KCC fell victim to the: A. Loser's curse B. Hamilton's blessing C. Winner's curse D. Winner's blessing

C. Winner's curse

When developing cash flows for capital budgeting, it is ____ to over look important items. A. Easy B. Impossible C. Rare D.Difficult

A. easy

Cash flows should always be considered on a(n) ____ basis. A. After-tax B. Pre-tax C. Zero-tax D. Before-tax

A. After-tax

When analyzing a project, sunk costs ___ incremental cash outflows. A. Are not B. Are

A. Are not