Chapter 9 terms

Opportunity costs are

Benefits lost due to taking on a particular project

Investment in net working capital arises when

Credit card sales are made Cash is kept for unexpected expenditures Inventory is purchased

Sunk costs are costs that

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

The stand-alone principle assumes that evaluation of a project may be based on the project's ________________ cash flows

Incremental

Accounts receivable and accounts payable are included in project cash flow estimation as part of changes in

Networking capital

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

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

Erosion will ______ the sales of existing products.

Reduce

Estimates of which of the following are needed to prepare pro forma income statements

Unit Sales Variable Costs Selling price per unit

In calculating cash flows, you should consider all financing costs

FALSE

True or false: Taxes are based on the difference between the initial cost and the sales price.

FALSE

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

IRR NPV Payback Period

The difference between a firm's cash flows with a project versus without the project is called

Incremental cash flows

Which of the following are reasons why NPV is considered a superior capital budgeting technique?

It considers the riskiness of the project It properly chooses among mutually exclusive projects It considers all the cash flows It considers tine value of money

Though depreciation is a non-cash expense, it is important to capital budgeting for these reasons:

It determines taxes owed on fixed assests when they are sold It affects a firm's annual tax liability It determines the book value of assets which affects net salvage value.

A positive NPV exists when the market value of a project exceeds its cost. Which of these two values is the most difficult to establish?

MARKET VALUE

The project cash flow equals the project operating cash flow _____ project change in NWC minus project capital spending.

MINUS

One of the most important steps in estimating cash flow is to determine the _________ cash flows.

Relevant and the first step