Chapter 10 FIN Connect

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

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

What is the net working capital?

Current assets minus current liabilities.

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

-Net cash flows from salvage value at the end of the 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.

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

-beneficial spillover effects -erosion effects

Opportunity Costs are classified as

Direct

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

Test Marketing expenses

Korporate Classics Corporation (KCC) won a bid to supply widgets to pace corporation but lost money on the deal because they underbid the project. KCC feel victim to the:

Winner's curse

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

after-tax

Which of the following are considered relevant cash flows?

cash flow from erosion effects cash flow from opportunity cost cash flow from beneficial spillover effects

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

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

net working capital

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 vacation or paying off the debt.

opportunity cost

Opportunity costs are classified as -------- cost in project analysis

relevant

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

relevant

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

true

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

-NPV -IRR -Payback period

Which of the following are considered relevant cash flows?

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

Investment in net working capital arises when

-inventory is purchased -Cash is kept for unexpected expenditures -credit sales are made

The rules for depreciating assets for tax purpose are based upon provision in the

1986 Tax Reform Act