Chapter 10 (1)

should be accepted if there is no capital rationing constraint

A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____.

2026

According to the 2017 Tax Cuts and Jobs Act, bonus depreciation is phased out after _____.

stand-alone

According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."

net working capital

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

The operating cash flows from net sales over the life of the project

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

increase

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

increase; increase

As depreciation expense ___, net income and taxes will decrease, while cash flows will ___.

aftertax

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

True

Cash flows should always be considered on an aftertax basis.

reduce

Erosion will ______ the sales of existing products.

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

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

increase

If the tax rate increases, the value of the depreciation tax shield will ______.

direct

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

ignored

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

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

Investment in net working capital arises when ___.

winner's curse

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 the _____.

bottom-up

OCF is calculated as net income plus depreciation using the _____ approach.

NPV payback period IRR

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

benefits lost due to taking on a particular project

Opportunity costs are ____

beneficial spillover effects erosion effects

Side effects from investing in a project refer to cash flows from _____.

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

Sunk costs are costs that ____.

stand

The ___ -alone principle is the assumption that evaluation of a project may be based on the project's incremental cash flows.

winners

The ___ curse says that the lowest bidder is the one who underbid the most.

first

The ___ step is to determine whether cash flows are relevant.

recovery

The accelerated cost ___ system is a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.

100

The bonus depreciation in 2019 was ___ percent.

erosion

The cash flows of a new project that come at the expense of a firm's existing projects is called ___.

unequal

The computation of equivalent annual costs is useful when comparing projects with _____ lives.

lives

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

net working capital

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

relevant

The first step in estimating cash flow is to determine the _________ cash flows.

1986 Tax Reform Act

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

book

When an asset is sold, there will be a tax savings if ___ the value exceeds the sales price.

easy

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

true

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

There is an additional depreciation deduction. The decrease in costs increases operating income

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

Tax shield approach

Which approach to estimating the operating cash flows uses the following equation? OCF = (Sales − Costs) × (1 − Tax rate) + Depreciation × Tax rate

Cash flows from opportunity costs Cash flows from beneficial spillover effects Cash flows from erosion effects

Which of the following are considered relevant cash flows?

Test marketing expenses

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

It is expected to be recovered by the end of the project's life.

While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital?

increase

With cost-cutting proposals, when costs decrease, operating cash flows ___.

Incremental

___ cash flows come about as a direct consequence of taking a project under consideration.

sunk cost

a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision.

stand-alone principle

the assumption that evaluation of a project may be based on the project's incremental cash flows

erosion

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

forma

A pro ___ financial statement projects future years' operations.

False

A sunk cost is an example of a relevant incremental cash flow.

depreciation taxes earnings before interest and taxes

Operating cash flow is a function of _____.

relevant

Opportunity costs are classified as ______ costs in project analysis.

False

Opportunity costs can be ignored when determining the financial feasibility of a project.

shield

The tax saving that results from the depreciation deduction is called the depreciation tax ___.

depreciation

To calculate the OCF using the bottom-up approach, add ___ to net income.

pro forma

To prepare _____ financial statements, we need estimates of quantities such as unit sales, the selling price per unit, the variable cost per unit, and total fixed costs.

opportunity; cost

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

As depreciation expenses increase, net income and taxes will decrease, while cash flows will increase.

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

incremental cash flows

the difference between a firm's future cash flows with a project and those without the project

opportunity cost

the most valuable alternative that is given up if a particular investment is undertaken.

OCF = Sales - Costs - Taxes

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

Fixed costs

What kind of costs are these? 1. cost of equipment 2. rent on a production facility

working

When a firm finances new investments, it may set up accounts payable with suppliers, but the balance that the firm must supply is called the investment in net ___ capital.

are not

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

won't

When analyzing a proposed investment, we ___ include interest paid or any other financing costs.

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

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

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

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

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

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

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

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