Finance DSM Ch. 8

Atlantic Airlines is considering offering new flight options for travel to South America. They expects sale will be $1,000,000 in the first year. Most of the sales will be to new customers, although they expect that 25% of the sales will come from existing customers. What level of incremental sales is associated with offering the new flight option?

$750,000

An incremental cash flow valuation considers

all project cash flows including cannibalization

Which of the following cash flows should be included in incremental free cash flows?

capital expenditures necessary to fund the new project

The ________________ value is the value of all cash flows beyond the project's forecast horizon

continuation

As a result of the Tax Cuts and Job Act, businesses can carry back current year losses for _____ years on their taxes and may carry forward losses _____.

0; indefinitely

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

Amount spent on a test market

Break-even analysis has numerous applications. For example, we could compute EBIT break-even which is the level of sales where

EBIT is equal to zero

Mega Industries owns property which it has rented for many years. Rather than continuing to rent out the space, they are considering using the building as a production facility for a new product. Which of the following is a relevant opportunity cost that should be considered an incremental cash flow?

Lost facility rental income

A conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by

a series of inflows

We only want to consider incremental earnings in the capital budgeting process. Incremental earnings are the

additional sales and costs associated with the project

A project is said to break-even when the project's NPV

equals zero

Capital budgeting is the process of

evaluating a firm's investment choices

A common use of break-even analysis is to determine

how many units of sales are needed to cover all costs

Which of the following would NOT be an adjustment to net income when calcuating free cash flow?

income tax expense

When a business undertakes a new project it will often need to invest additional funds in net working capital to cover items such as

increased inventory levels

The relevant cash flows of a project are best described as

incremental cash flows

The most rapid method of depreciation allowed under U.S. tax code is the

modified accelerated cost recovery system

The sale of an ordinary asset for its book value results in

no tax benefit

Sunk costs are

previous cash outflows not relevant to the project decision

A method for evaluating a project that uses a number of possible values for a given variable, such as cash inflows, to assess its impact on the firm's return is

sensitivity analysis

_______________________________ allows us the see how much the NPV changes when the underlying project assumptions change

sensitivity analysis

Which of the following is an example of an externality that will generate relevant cash flows?

the additional sales revenue of complementary products

The tax savings generated due to the ability to expense or depreciate an asset for tax purposes is known as

the depreciation tax shield