Ch.12

A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct? A. The lot is not an incremental cash flow because it is not being utilized at this time. B. The lot is an incremental cash flow because it represents an opportunity cost. C. The lot is an incremental cash flow because it represents a sunk cost. D. The lot is not an incremental cash flow because it has already been paid for.

B

AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of a(n) _______________. A. Opportunity cost B. Sunk cost C. Incremental cash flow D. Relevant cash flow

B

ABC Engineering just purchased a new machine. All of the following are examples of incremental cash flows except _______________. A. Freight charged to ship the machine B. Developmental costs to determine which machine would best work with their unique process C. Increase in electric bill to run the machine D. Reduction in maintenance expense associated with the new machine

B

Accelerated depreciation allows firms to A. receive less of the dollars of depreciation earlier in the asset's life. B. receive more of the dollars of depreciation earlier in the asset's life. C. not pay any taxes during an asset's life. D. receive more of the dollars of depreciation later in the asset's life.

B

All of the following are incremental cash flows attributable to the project except _____. A. Opportunity costs B. Financing costs C. Substitutionary effects D. Complementary effects

B

A decrease in net working capital (NWC) is treated as a A. cash inflow B. cash outflow C. sunk cost D. historical cost

A

A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications which has a monthly cost of $50 per month. This is an example of _____________. A. Incremental cash flow B. Sunk cost C. Complementary costs D. None of these

A

ABC Engineering just bought a new machine. All of the following are examples of incremental cash flows except _______________. A. Interest expense on the loan used to purchase the machine B. Installation costs on the new machine C. Increase in costs as a result of the new machine D. Increases in depreciation expenses as a result of the new machine

A

Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as A. complementary effects. B. substitutionary effects. C. sunk effects. D. marginal effects.

A

This is used as a measure of the total amount of available cash flow from a project. A. free cash flow B. operating cash flow C. investment in operating capital D. sunk cash flow

A

Which of the following statements is correct? A. A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things. B. A decrease in NWC involves either an increase in current assets, which generates cash, or a decrease in current liabilities, thereby freeing up the shareholder's cash for other things. C. An example of an increase in a net working capital is to buy more machines or another plant. D. None of these statements is correct.

A

As new capital budgeting projects arise, we must estimate A. the float costs for financing the project. B. when such projects will require cash flows. C. the cost of the loan for the specific project. D. the cost of the stock being sold for the specific project.

B

Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as A. complementary effects. B. substitutionary effects. C. sunk effects. D. marginal effects.

B

One way to account for flotation costs of raising capital is to A. adjust all the project's cash flows so that each year it will reflect the flotation costs. B. adjust the project's initial cash flow so that it will reflect the flotation costs. C. adjust only the project's operating cash flows to account for paying back the shareholders. D. adjust the project's tax burden to account for the tax implications of raising capital.

B

Section 179 allows a business, with certain restrictions, to do which of the following? A. Offset the tax liability with the cost of the asset in the year of purchase. B. Expense the asset immediately in the year of purchase. C. Expense the asset using double declining balance depreciation during the life of the asset. D. Get a government grant to purchase the asset.

B

The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as the _________________. A. Substitute and complement B. Pro forma analysis C. Incremental cash flows D. Estimation and depreciation analysis

B

The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year. They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products. This is an example of ___________. A. Substitutionary effect B. Complementary effect C. Opportunity effect D. Sunk cost

B

When looking at these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life. A. incremental B. replacement C. cost-cutting D. new

B

With regard to depreciation, the time value of money concept tells us that A. delaying the depreciation expense is always better. B. taking the depreciation expense sooner is always better. C. delaying the depreciation expense is sometimes better. D. taking the depreciation expense sooner is sometimes better

B

A local bank is contemplating opening a new branch bank in a large superstore across town from their main office. It is estimated that the new branch will generate $20,000 after expenses each month. The manager wonders if all these revenues should be considered an incremental cash flow. Given this information, which of the following statements is correct? A. $20,000 is generated by the new branch bank and therefore it is an incremental cash flow. B. We would first need to assess the opportunity cost of placing a branch in a different location to answer this question. C. Some amount less than the $20,000 is incremental because of substitutionary effects. D. Some amount less than the $20,000 is incremental because of complementary effects.

C

Coke is planning on marketing a new drink called Very Berry Coke which is a mixture of raspberry and blackberry flavors blended to perfection and added to the highly secret Coca-Cola formula. This new product is expected to reduce the sales of their existing product, Cherry Coke, by $10 million dollars per year. This is an example of a _______________. A. Pro forma effect B. Complementary effect C. Substitutionary effect D. Opportunity effect

C

Due to rapid growth, a computer superstore is contemplating expanding by adding another location. Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion? A. The company owns the land of the future site of the new location. B. The new location is expected to take sales away from the existing location. C. The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner. D. All of these items should be included in the analysis.

C

For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity? A. choosing between projects with differing risks B. choosing between independent project C. choosing between alternative assets with differing lives D. choosing between alternative assets with equal lives

C

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n) ________________. A. Incremental cash outflow B. Opportunity cost C. Sunk cost D. Expensible item

C

The best approach to convert an infinite series of asset purchases into a perpetuity is known as the A. Net working capital approach B. Net present value approach C. Equivalent annual cost approach D. Equivalent annual cash flow approach

C

This is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life. A. bell curve cycle B. coefficient of variation C. product life cycle D. NWC life cycle

C

This is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements. A. incremental cash flows B. cash flow analysis C. pro forma analysis D. substitutionary analysis

C

Which of the following is NOT included when calculating the depreciable basis for real property? A. freight charges for item B. sales tax paid for item C. financing fees D. installation and testing fees

C

All of the following can be included in the depreciable basis of an asset except _______. A. Freight charges B. Installation fees C. Sales tax D. Variable costs

D

An asset's cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees is referred to as the ___________________. A. Opportunity cost B. Sunk cost C. Asset costing reference D. Depreciable basis

D

Concerning incremental project cash flow, this is a cost one would never count as an expense of the project. A. initial investment B. taxes paid C. operating expenses of the project D. financing costs

D

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a A. committed cost B. complementary cost C. obligated cost D. sunk cost

D

This is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period. A. mid-point convention B. mid-month convention C. mid-quarter convention D. half-year convention

D

When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following? A. EBIT - Interest - Taxes + Depreciation B. EBIT - Taxes C. EBIT + Depreciation D. EBIT - Taxes + Depreciation

D

Which of the following statements is correct with respect to Section 179 deductions? A. It was designed to help small businesses. B. It allows the firm to expense the asset immediately in the year of purchase. C. Most businesses can expense up to $108,000 of property placed in service during each year. D. All of these are correct statements.

D

Which of the following statements is correct? A. Most current assets are depreciated using the MACRS depreciation calculation. B. Most large corporations use Section 179 to depreciate their assets. C. Most businesses benefit from accelerated depreciation; therefore the straight-line depreciation method is preferred by most businesses. D. None of these statements is correct.

D