CHapter 10 Finance

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

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows.

Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals.

E. I, II, III, and IV

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

Sunk Cost

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

$1,200 paid to repair a machine last year

The depreciation tax shield is best defined as the:

amount of tax that is saved because of the depreciation expense.

Which one of the following will increase a bid price?

an increase in the required rate of return

Changes in the net working capital requirements

can affect the cash flows of a project every year of the project's life.

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

decrease in accounts receivable

The bid price is:

the minimum price you should charge if you want to financially breakeven.

Which one of the following statements is correct?

A. Project analysis should only include the cash flows that affect the income statement. b A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a project. D. Interest expense should always be included as a cash outflow when analyzing a project. E. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project

I and IV only

Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary

I, II, and IV only

Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product

II, III, and IV only

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity Cost

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Sunk

The operating cash flow of a cost cutting project:

can be positive even though there are no sales.

Net working capital:

can create either a cash inflow or a cash outflow at time zero of a project.

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

equivalent annual cost

Which one of the following best describes pro forma financial statements?

financial statements showing projected values for future time periods

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm 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 the increased workload should the firm accept the wreath project

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the:

lowest equivalent annual cost.

Which one of the following best 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

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