10: Making Capital Investment Decisions

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

1,200 paid to repair a machine last year

Pro forma statements for a proposed project should generally:

1. Be compiled on a stand-alone basis 2. include all project-related fixed asset acquisitions and disposals 3. include all the incremental cash flows related to the project 4. include taxes DO NOT INCLUDE INTEREST EXPENSE

Which one of the following is a project cash inflow? Ignore any tax effects

Decrease in inventory

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?

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

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Initial investment in inventory to support the project

The operating cash flow for a project should exclude which one of the following?

Interest expense

A projects cash flow is equal to the project's operating cash flow:

Minus both the projects change in net working capital and capital spending

Which one of the following should not be included in the analysis of a new product?

Money already spent for research and development of a new product

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

Opportunity cost

Which one of the following illustrates erosion as it relates to a hot dog stand located on the beach?

Selling fewer hot dogs because hamburgers were added to the menu

Pro forma financial statements can best be described as financial statements

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

Stand-alone principle

GL plastics spent $1200 repairing a machine. They are trying to decide if the machine be better utilized for a proposed project. When analyzing the proposed project, the $1200 should be classified as which type of cost?

Sunk

Which one of the following costs was incurred in the past and cannot be recouped?

Sunk

Which one of the following best describes the concept of erosion?

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

The difference between the 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 projects

incremental cash flows

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

net income + depreciation