Chapter 10

Net working capital

the difference between a firm's current assets and its current liabilities

Reduce

Erosion will ___ the sale of existing products?

Direct

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

ignored

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

- Credit sales are made - Cash is kept for unexpected expenditures - 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:

-Earnings Before Interest and Taxes -Taxes -Depreciation

Operating cas flow is a funciton of:

Relevant costs

Opportunity costs are classified as:

Benefits lost due to taking on a particular project

Opportunity costs are:

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

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

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?

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

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

Increase since it will decrease the taxes paid

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

After-tax

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

- Erosion effects - Beneficial spillover effects.

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

False

T or F: A sunk cost is an example of a relevant incremental cash flow.

100%

The bonus depreciation in 2019 will be:

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:

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 investmenets or uses, such as a vacation or paying off a debt.

- Cash flows from erosion effects - Cash flows from beneficial spillover effects - Cash flows from opportunity cost

What are considered relevant cash flows?

- Rent on a production facility - Cost of equipment

What are examples of fixed costs?

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

What are the three main sources of cash flows over the life of a typical project?

Test marketing expenses

What is an example of a sunk cost?

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

What is the equation for estimating operating cash flows using the tax shield approach?

OCF = Sales - Costs- Taxes

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

Are not

When analyzing a project, sunk cost __ incremental cash outflows.

- Payback period - NPV - IRR

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

Easy

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