Managerial Finance Ch 6.

If sales are made on credit, net working capital will ___

remain the same

Which of the following is an example of an opportunity cost?

rental income likely to be lost by using a vacant building for an upcoming project

Which of the following should be discounted when determining the feasibility of a capital budgeting project(s)?

Cash flows

Firms generally maintain two sets of books, one for the IRS and the other for the purposes of generating financial statements according to the Blank______

FASB

True or false: Opportunity costs can be ignored when determining the financial feasibility of a project.

False

The shareholders' books in the United States follow the rules of the Blank______

Financial Accounting Standards Board (FASB)

________ expenses incurred on debt financing are ignored when computing cash flows from a project.

Interest

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

Opportunity; Cost

What is the depreciation tax shield if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent?

$540

According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent?

$2,220

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

Sunk costs are costs that Blank______

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

When interest rates and inflation rates are Blank______, the approximation of the real interest rate becomes Blank______.

high; poor low; good

When comparing projects with unequal lives, one should use which of the following methods Blank______.

equivalent annual costs

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

increase

If the inflation rate increases, the nominal rate of interest will Blank______.

increase

Synergy will Blank______ the sales of existing products.

increase

Buying new cost-cutting equipment affects operating cash flows by Blank______.

increasing pretax income increasing the depreciation deduction increasing taxes

investment in net working capital arises when Blank______

inventory is purchased cash is kept for unexpected expenditures credit sales are made

Under capital budgeting, required working capital is classified as a cash Blank______

outflow

Management may look Blank______ to shareholders and pay Blank______ tax on reported profit

profitable; no

As a general rule, when estimating equivalent annual costs, Blank______ cash flows should be used

real

What are the two sets of accounting books?

tax books shareholders' books

It is appropriate to use the approximate formula for estimating the real interest rate when Blank______

the interest rate and inflation rate are low

When a firm evaluates a proposal to make an existing facility more cost-effective, the cost savings must be large enough to justify Blank______

the necessary capital expenditure

True or false: NPV will be the same regardless of whether nominal or real cash flows are used.

true

Sometimes when the low bidder wins the bid on a project, it is because they have underbid the project. In other words, the bid they have submitted probably won't even cover the costs of the project. When this happens, the low bidder is said to suffer from the Blank______.

winner's curse

The bottom-up approach to calculating OCF starts with Blank______.

Net income

What is the approximate formula for estimating the real interest rate?

Real interest rate = Nominal interest rate − Inflation rate

Discounting is the process of Blank______.

calculating the present value of either a lump sum or a series of cash flows

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

lives

As a general rule, when estimating equivalent annual costs, Blank______ cash flows should be used.

real

Which of the following is (are) true about allocated costs

-These costs benefit more than one project -These costs are allocated to more than one project.

______ cash flows are the difference between the cash flows of the firm with the project and the cash flows of the firm without the project.

Incremental

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

OCF = (Sales − Costs) × (1 − Tax rate) + Depreciation × Tax rate

Opportunity costs are classified as Blank______

Relevant costs

Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of Blank______

accepting a project

Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of Blank______. Multiple choice question.

accepting a project

Opportunity costs are Blank______.

benefits lost due to taking on a particular project

Corporate finance emphasizes Blank______, while financial accounting emphasizes Blank______.

cashflows; earnings

Allocated costs must be treated as relevant or incremental costs Blank______

only if the costs being allocated are affected by the proposed project

When comparing projects with different lives, one should choose the project with the Blank______ equivalent annual cost

lower

When using nominal cash flows, the NPV will be Blank______ when using real cash flows.

the same as

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

There will be a tax saving if the book value exceeds the sales price. Taxes are based on the difference between the book value and the sales price. Book value represents the purchase price minus the accumulated depreciation

What is the equation for estimating operating cash flows using the top-down approach?

OCF = Sales − Cash costs − Taxes

At the end of a project, the company sold a machine for $50,000 with a book value of $10,000. Assuming a tax rate of 21 percent, what is the after tax salvage value?

$41,600 ($50,000-$10,000) X.21= $8,400 50,000 - 8400 = 41,600

What is the equation for determining the real interest rate?

1+Nominal Interest Rate/ 1+Inflation Rate − 1

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

As depreciation expense increases, net income and taxes will decrease, while investment cash flows will increase.

How does depreciation affect the operating cash flows?

Depreciation expense reduces the taxable income and taxes, and increases the operating cash flow.

Identify the three main sources of cash flows over the life of a typical project

Net cash flows from sales and expenses over the life of the project. Net cash flows from salvage value at the end of the project. Cash outflows from investment in plant and equipment at the inception of the project.

Depreciation × Tax rate represent the depreciation tax

Shield

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

are not

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

ignored

As depreciation Blank______, operating cash flows will Blank______

increases; increase decreases; decrease

When comparing projects with different lives, one should choose the project with the Blank______ equivalent annual cost.

lower

When bidding for a job, a competing firm can use the NPV approach to determine its bid. Once the bid is submitted, the firm will win the contract for the project if their bid is the Blank______

lowest

Which of the following refers to a cash flows purchasing power?

real cash flow

When a firm evaluates a proposal to make an existing facility more cost-effective, the cost savings must be large enough to justify Blank______.

the necessary capital expenditure

Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast?

the salvage value of the project

If the nominal rate is 5 percent and the annual rate of inflation is 2 percent, what is the real rate of return?

2.94%

Erosion will Blank______ the sales of existing products

reduce