Chapter 10

Which one of the following should not be included in the analysis of a new product?

Money already spent for research and development of the new product

Which one of the following best describes the concept of erosion?

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

Which one of the following is an example of a sunk cost?

$1,200 paid to repair a machine last year

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

stand-alone principle

Pro forma financial statements can best be described as financial statements:

showing projected values for future time periods.

You own a house that you rent for $1,400 per month. The maintenance expenses on the house average $260 per month. The house cost $231,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $253,000. If you sell the house you will incur $20,240 in real estate fees. The annual property taxes are $3,100. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

$232,760

Shelton Co. purchased a parcel of land six years ago for $861,500. At that time, the firm invested $133,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $48,000 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $913,000. What value should be included in the initial cost of the warehouse project for the use of this land?

$913,000

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Hiring additional employees to handle the increased workload should the firm accept the wreath project

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Initial investment in inventory to support the project

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

Net income + Depreciation

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity cost

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Selling fewer hot dogs because hamburgers were added to the menu

GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Sunk

Which one of the following costs was incurred in the past and cannot be recouped?

Sunk

Pro forma statements for a proposed project should generally do all of the following except:

include interest expense

A project's cash flow is equal to the project's operating cash flow:

minus both the project's change in net working capital and capital spending.

Which one of the following is a project cash inflow? Ignore any tax effects.

Decrease in inventory

The operating cash flow for a project should exclude which one of the following?

Interest expense

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows