3671 ch6
3 main sources of cash flows over the life of a typical project
1. cash outflows from investment in plant and equipment at the inception of the project 2. net cash flows from sales and expenses over the life of the project 3. net cash flows from salvage value at the end of the project
when analzying a project, sunk costs ___ incremental cash outflows
ARE NOT
top-down approach
OCF = Sales - Costs - Taxes
OCF for tax shield
OCT = (sales - costs) x (1 - tax rate) + depreciation x tax rate
allocated costs must be treated as relevant or incremental costs ______
ONLY IF the costs being allocated are affected by the proposed project
under capital budgeting, opportunity costs are cash ______
OUTflows
Opportunity costs are ____
benefits LOST due to taking on a particular project
Allocated costs arise when a specific expenditure _____
benefits more than one project or divison
which of the following is given greater importance in capital budgeting problems in corporate finance?
cash flows
corporate finance emphasizes ____ while financial accounting emphsizes in _____
cash flows; earnings
Investment in net working capital arises when ____.
cash is kept for unexpected expenditures credit sales are made inventory is purchased
depreciation x tax rate =
depreication tax shield
(t/f) 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
interest expenses incurred on debt financing are _____ when computing cash flows from a project
ignored
Interest on municipal bonds is ______.
ignored for tax purposes but included as income for FASB accounting
If sales are made on credit, net working capital will...
increase
Syngery will ____ the sales of existing products.
increase
Buying new cost-cutting equipment affects operating cash flows by:
increasing PRETAX income increasing TAXES Increasing depreciation deduction
_____ expenses incurred on debt financing are ignored when computing cash flows from a prject
interest
when bidding for a job, a competing firm can use the NPV approach to determine their bid. once the bid is submitted, the firm will win the contract for the project if their bid is the:
lowest
The bottom-up approach to calculating OCF starts with:
net income
Eroison will ____ the sales of existing products
reduce
opportunity costs are classified as ____ costs in project analysis.
relevant
what are the two sets of accounting books?
tax and shareholders'
When a firm evaluated a proposal to make an existing facility more cost-effective, the cost savings must be large enough to justify:
the necessary capital expenditure
sometimes when the low bidder wins the bid on a project, it is b/c they have underbid the project. in other words, the bid they have submitted probably won't even cover the costs of the project. when this happens, the low bidder is said to suffer from the:
winner's curse
when comparing projects with unequal lives, one should use...
EAC (equivalent annual costs)
the shareholders' books in the US follow the rules of the _____
FASB (financial accounting standards board)
(t/f) The opportunity costs can be ignored when determining the financial feasibility of a project
False
among the 3 main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?
The operating cash flows from net sales over the life of the project