FIN3403-ch10

Which of the following are fixed costs?

-cost of equipment -rent on a production facility

According to the ___ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "mini firm."

stand-alone

Investment in net working capital arises when ___.

-inventory is purchased -credit sales are made -cash is kept for unexpected expenditures

The rules for depreciating assets for tax purposes are based upon provisions in the ___.

1986 Tax Reform Act

A sunk cost is an ex of a relevant incremental cash flow.

false

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

increase

If the tax rate increases, the value of the depreciation tax shield will ___.

increase

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

net working capital

The difference between a firm's current assets and its current liabilities is known as the ___.

net working capital

Erosion will ____ the sales of existing products.

reduce

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

-payback period -IRR -NPV

Operating cash flow is a function of:

-taxes -depreciation -earnings before interest and taxes

Opportunity costs are ___.

the benefits lost due to taking on a particular project

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

relevant

According to the top-down approach, what is the operating cash flow if sales are $200k, total cash costs are $190,636 and the tax bill is $1144?

Top-down approach: OCF=Sales-costs-taxes OCF=200,000-190,636-1144 =$8220

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

direct

When developing cash flows for capital budgeting, it is ___ to overlook important items.

easy

Cash flows should always be considered on a(n) ____ basis.

after-tax

When analyzing a project, sunk costs ___ incremental cash outflows.

are not

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

-erosion effects -beneficial spillover effects

Identify the three main sources of cash flows over the life of a typical project.

-net cash flows from sales and expenses over the life of the project -cash outflows from investment in plant and equipment at the inception of the project -net cash flows from salvage value at the end of the project

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

-the decrease in costs increases operating income -there is an additional depreciation deduction

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

-there will be a tax savings if the book value exceeds the sales price -book value represents the purchase price minus the accumulation;ated depreciation -taxes are based on the difference between the book value and the sales price

Which one of the following is the equation for estimating operating cash flows using the tax shield approach?

OCF= (Sales-Costs) x (1-T) + Depreciation x T

According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent?

OCF= net income + depreciation net income= EBIT-taxes OCF=(600-600x.3)+1,800 =420+1,800 =$2,220

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

as depreciation expense increases, net income and taxes will decrease, while cash flows will increase

What is net working capital?

current assets minus current liabilities

Sunk costs are costs that ___.

have already occurred and are not affected by accepting or rejecting a project

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

Using your personal savings to invest in your business is considered to have an ______ because you are giving up the use of these funds for other investments or uses, such as a vacation or paying off a debt.

opportunity cost

Opportunity costs are classified as __ costs in project analysis.

relevant