Smartbook 10

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

- Cash outflows from investment in plant and equipment at the inception of the 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

Operating cash flow is a function of:

- Depreciation - EBIT - Taxes

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

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

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

Opportunity costs are ___

benefits lost due to taking on a particular project

Incremental cash flows come about as a(n) ___ consequence of taking a project under consideration

direct

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

easy

Side effects from investing in a project refer to cash flows from:

erosion effects beneficial spillover effects

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

lives

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

net working capital

The difference between a firm's current assets and its current liabilities is known as the ___

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 over investments or uses, such as a vacation or paying off a debt

opportunity cost

Erosion will ____ the sales of existing products

reduce

According to the ___ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "mini-farm"

stand-alone

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

test marketing expenses

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

1986 Tax Reform Act

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

ignored when estimating cash flows from a project, we are only concerned with flows that result from the assets of the project. How we aid for those assets is not relevant

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

after-tax

Which of the following are fixed costs?

cost of equipment rent on a production facility

Investment in net working capital arises when ___

1. cash is kept for unexpected expenditures 2. credit sales are made 3. inventory is purchased

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?

$2,274 Net Income = EBIT -Taxes =600 - (600*.3) Net Income = 420 BOTTOM UP APPROACH NI + 1800

What is the depreciation tax shield if EBIT is $600, depreciation is $1,800, and the tax rate is 21%

$378 Depr. Tax = Depr. X Tax Rate =$1800 X 21% =

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

$8,220 Sales - Costs - Taxes

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

1. IRR 2. NPV 3. Payback Period

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%

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 cash flows will INCREASE

T/F - A sunk cost is an example of a relevant incremental cash flow

False

While making capital budgeting decisions., which of the following sentence is true regarding 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 cash flows using the tax shield approach?

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

What is the equation for estimating 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

Palmer Corp is choosing between server X and server Y to replace its current equipment. It has gathered the following information: SERVER X Y ESTIMATED LIFE 2 years 3 years NPV -$143,261 -$203,229

Server Y

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

increase

An increase in depreciation expense will ___ cash flows from operations

increase because it will decrease taxes paid

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