FIN 125 EXAM 3 CH.10

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? Select one: Loan obtained to finance the project Initial investment in inventory to support the project Annual depreciation tax shield Aftertax salvage value Net working capital recovery

Initial investment in inventory to support the project

Which one of the following best describes the concept of erosion? Select one: Expenses that have already been incurred and cannot be recovered Change in net working capital related to implementing a new project The cash flows of a new project that come at the expense of a firm's existing cash flows The alternative that is forfeited when a fixed asset is utilized by a project The differences in a firm's cash flows with and without a particular project

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

A project's cash flow is equal to the project's operating cash flow: Select one: plus the project's depreciation expense minus both the project's taxes and capital spending. minus both the project's change in net working capital and capital spending. minus the project's change in net working capital plus all of the depreciation expenses. plus the project's depreciation expenses minus the project's taxes. minus the project's taxes. Feedback

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

Which one of the following costs was incurred in the past and cannot be recouped? Select one: Incremental Side Sunk Opportunity Erosion

sunk

Which one of the following is an example of a sunk cost? Select one: $1,500 of lost sales because an item was out of stock $1,200 paid to repair a machine last year $20,000 project that must be forfeited if another project is accepted $4,500 reduction in current shoe sales if a store commences selling sandals $1,800 increase in comic book sales if a store ceases selling puzzles

$1,200 paid to repair a machine last year

Which one of the following should not be included in the analysis of a new product? Select one: Increase in accounts payable for inventory purchases of the new product Reduction in sales for a current product once the new product is introduced Market value of a machine owned by the firm which will be used to produce the new product Money already spent for research and development of the new product Increase in accounts receivable needed to finance sales of the new product

Money already spent for research and development of the new product

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: Select one: incremental cash flows internal cash flows. external cash flows. erosion effects. financing cash flows.

incremental cash flows

Pro forma financial statements can best be described as financial statements: Select one: expressed in a foreign currency. where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales. showing projected values for future time periods. expressed in real dollars, given a stated base year. where all accounts are expressed as a percentage of last year's values.

showing projected values for future time periods.

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? Select one: Underlying value principle Stand-alone principle Equivalent cost principle Salvage principle Fundamental principle

stand-alone principle

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? Select one: $0 $1,046,000 $861,500 $994,500 $913,000

913,000 (fair value of the land)

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? Select one: EBIT + Depreciation EBIT(1 + Taxes) Net income + Depreciation (Sales − Costs)(1 − Depreciation)(1 − Taxes) (Sales − Costs)(1 − Taxes)

Net income + Depreciation

Pro forma statements for a proposed project should generally do all of the following except: Select one: be compiled on a stand-alone basis. include all project-related fixed asset acquisitions and disposals. include all the incremental cash flows related to the project. include taxes. include interest expense.

include interest expense

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? Select one: $0 $253,000 $231,000 $228,000 $232,760

$232,760 (opportunity cost = 253,000 - 20,240)

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? Select one: Storing supplies in the same space currently used for materials storage Utilizing the basket manager to oversee wreath production Hiring additional employees to handle the increased workload should the firm accept the wreath project Researching the market to determine if wreath sales might be profitable before deciding to proceed Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt

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

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? Select one: Providing both ketchup and mustard for customers' use Repairing the roof of the hot dog stand because of water damage Selling fewer hot dogs because hamburgers were added to the menu Offering french fries but not onion rings Losing sales due to bad weather

Selling fewer hot dogs because hamburgers were added to the menu

Which one of the following is a project cash inflow? Ignore any tax effects. Select one: Decrease in accounts payable Increase in accounts receivable Decrease in inventory Depreciation expense Equipment acquisition

decrease in inventory

The operating cash flow for a project should exclude which one of the following? Select one: Taxes Variable costs Fixed costs Interest expense Depreciation tax shield

interest expense

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? Select one: Salvage value Wasted value Sunk cost Opportunity cost Erosion

opportunity cost

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? Select one: Opportunity Fixed Incremental Erosion Sunk

sunk