Finance Chp 6

What is the equation for determine the real interest rate?

(1+Nominal Interest Rate/1+ Inflation Rate)-1

It is appropriate to use the approximate formula for estimating the real interest rate when:

The interest rate and inflation rate are low

Which of the following is given greater importance in capital budgeting problems in corporate finance?

Cash Flows

Which of the following should be discounted when determining the feasibility of a capital budgeting project?

Cash Flows

Investment in net working capital arises when ______.

Cash is kept for unexpected expenditures, inventory is purchased, and credit sales are made

Firms generally maintain two sets of books, one for the IRS and the other for the purposes of generate financial statements according to the ______

FASB

True or false: A sunk cost is an example of a relevant incremental cash flow

False

Interest expenses incurred on debt financing are ____ When computing cash flows from a project.

Ignored

If the inflation rate increases the nominal rate of interest will

Increase

Investment in networking capital rises when_____.

Inventory is purchased, credit sales are made, and cash is kept for unexpected expenditures

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

OCF=(Sales-Costs) x (1-Tax rate) + Depreciation x Tax Rate

Sometimes when the low bidder wins the bid on a project, it is because they have underbid the project. In other words, the bid they have submitted probably won't even cover the cost of the project. When this happens, a low bidder is said to suffer from the:

Winners curse

What is the difference between nominal cash flows and real cash flow?

nominal cash flow is the actual dollars to be received. real cash flow refers to the cash flow's purchasing power.

Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of:

Accepting a project

How does depreciation affect the operating cash flow's?

Depreciation expense reduces the taxable income and taxes, increases the operating cash flow.

The computation of equivalent annual cost is useful when comparing projects with unequal

Lives

3 Main sources of Cash Flows over the life of a typical project are:

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

As a general rule, when Estimated equivalent annual cost, ______ cash flow should be used.

Real

What is the approximate formula for estimating the real interest rate?

Real interest rate equals nominal interest rate minus inflation rate

Which of the following is true about allocated costs?

These costs are allocated to more than one project and they benefit more than one project

Which of the following are true about allocated cost?

These costs are allocated to more than one project, and these costs benefit more than one project.

True or false: NPV Will be the same regardless of whether nominal real cash flows are used

True: as long as nominal cash flows are discounted at the nominal rate in real cash flows are discount at the real rate, theNPV will be the same.

The difference between a firm's current assets and its current liabilities is know as the

Net working capital

Allocated costs must be treated as relevant or incremental cost _____.

Only if the cost being allocated are affected by the proposed project.

Using your personal savings to invest in your business in considered to have an ______ ______ because you are giving up these funds for other investments or uses

Opportunity Cost

Which of the following correctly describes the relationship between deprecation, income, taxes, and investment cash flows

As depreciation expenses increase, net income and taxes will decrease, while investment cash flows will increase.

Allocated costs arise when a specific expenditure ______.

Benefits more than one project or division.

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

Book value represents the purchase price minus he accumulated depreciation, taxes are based on the difference between the book value and the sales price, and there will be a tax savings if the book value exceeds the sales price.

Synergy will _____ the sales of existing products

Increase

What are the two sets of accounting books?

Shareholder's books and Tax books

According to the bottom up approach, what is the OCF if EBIT is $600, depreciation is $1800, and the tax rate is 30%

$2220

According to the top-down approach, what is the operating cash flow if sales are $200k total cash costs are 190, 636, and the taxbill is $1,144?

8,220

True or false: Opportunity costs can be ignored when determining the financial feasibility of a project.

False; opportunity costs are relevant cash flows that should be included when determine the financial feasibility of a project

If the tax rate increases, the value of the depreciation tax shield will_____

Increase

Buying new cost cutting equipment affects operating cash flows by:

Increasing the depreciation deduction, increasing taxes, increasing pretax income