fin630-c10

Investment in net working captial arises when ___.

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

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

IRR2 NPV3 payback period

Operating cash flow is a function of:

Operating cash flow =EBIT+ Depreciation- Taxes) Depreciation Earnings Before Interest and Taxes Taxes

Palmer Corp is choosing between server X and server Y to replace its current equipment. It has gathered the following information:Server Est Life NPVX 2 years ($143,261)Y 3 years ($203,229)If Palmer's required rate of return is 8%, which server should it choose?

Pick Server Y (see below) Server X: n = 2 i = 8 PV = -143,261 PMT = ?? ($80,336.36) Server Y: n = 3 i = 8 PV = -203,229 PMT = ?? ($78,859.66)

Cash flows should always be considered on a(n) ____________ basis.

after-tax

When analyzing a project, sunk costs _____ incremental cash outflows.

are not

Incremental cash flows come about as (a) ______ consequence of taking a project under consideration.

direct

When developing cash flows for capital budgeting, it is ____ to overlook important items.

easy

Sunk costs are costs that ___.

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

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

ignored

An increase in depreciation expense will ______ cash flows from operations.

increase

Opportunity costs are classified as ____ costs in project analysis.

relevant

According to the _______ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm".

stand-alone

When evaluating cost-cutting proposals, how are operating cash flows affected?

there is an additional depreciation deduction the decrease in costs increases operating income

Erosion will ____ the sales of existing products.

to reduce

Identify the tree main sources of cash flow over the life of a typical project.

* Net cash flows from salvage value at the end of project * Net cash flows from sales and expenses over the life of the project * Cash outflows from investments in P&E at the inception of the project According to the bottom-up

Which of the following are considered relevant cash flows?

-cash flows from beneficial spillover effects -cash flows from opportunity costs -cash flows from erosion effects

Which of the following are fixed costs?

-cost of equipment -rent on a production facility

If a firm's current assets are $150,000, its total assets are $320,000, and its current liabilities are $80,000, what is its net working capital?

Answer: $150,000 - $80,000 = $70,000

If the tax rate increases, the value of the depreciation tax shield will _________.

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

While making capital budgeting decisions, which of the following sentence is true regrading the initial investment of net working capital?

It is expected to be recovered by the end of the project's life.

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

OCF = (Sales - Costs) x (1 - T) + Depreciation x T

Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in _____ are overlooked.

net working capital

Using your personal savings to invest in your business is considered to have a(n) _________ ___________ because you are giving up the use of these funds for others investments or uses, such as a vacation or paying off a debt.

opportunity cost

Korporate Classics Corporation (KCC) won a bid to supply widgets to Pacer Corporation but lost money on the deal because they underbid the project. KCC fell victim to _____.

winner's curse

According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 21 percent?

$2,274

According to the top-down approach, what is the operating cash flow if sales are $200,000, total cash costs are $190,636, and the tax bill is $1,144?

$8,220 Top-down Approach:Sales - Costs - Taxes (200,000 - 190,636 - 1,144) =$8,220

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

(Depreciation is a noncash expense. The only cash flow effect of deducting depreciation is to reduce our taxes, a benefit to us.) -As depreciation expense increases, net income and taxes will decrease, while cash flows will increase.

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

1. taxes are based on the difference between the book value and the sales price. 2. book value represents the purchase price minus the accumulated depreciation. 3. there will be a tax savings if the book value exceeds the sales price.

The bonus depreciation in 2019 will be:

100%

The computation of equivalent annual costs is useful when comparing projects with unequal _____.

lives (for example, when you are comparing two similar machines for the same purpose but one has a shorter life and is cheaper and the other is more expensive with a longer life).

The rules for depreciating assets for tax purposes are based upon provisions in the:

1986 Tax Reform Act

what is the equation for estimate operating cash flows using the top-down approach?

OCF = Sales - Costs - Taxes

The first step in estimating cash flow is to determine the ____ cash flows.

relevant