Chapter 8

An increase in depreciation expense will ____ cash flows from operations. a. increase b. not affect c. decrease

A

The actual dollars to be received or paid out is referred to as a a. nominal cash flow. b. capital cash flow. c. real cash flow. d. inflation cash flow.

A

What are the two sets of accounting books? Select all that apply a. Tax books b. Finance books c. Auditors' books d. Stokholders' books

A & D

Which of the following are considered relevant cash flows? Select all that apply a. Cash flows from erosion effects b. Cash flows from opportunity costs c. Cash flows from synergy effects d. Cash flows from sunk costs

A, B, & C

Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of a. issuing bonds. b. repurchasing outstanding shares. c. changing a firm's WACC. d. accepting a project.

D

Adjustments for debt financing are generally reflected in the ____ ____, not the cash flows.

Discount Rate

Which of the following is an example of an opportunity cost? a. Money spent on advertising to take advantage of opportunities in the market b. Lowering taxes by increasing depreciation expenses c. Rental income likely to be lost by using a vacant building for an upcoming project

C

Which of the following is given greater importance in capital budgeting problems in corporate finance? a. Earnings b. Depreciation c. Cash flows d. Earnings after taxes

C

What is the real interest rate if the nominal annual interest rate is 10 percent and the annual inflation rate is 4 percent? a. 5.69% b. 6.08% c. 5.77% d. 6.03%

C [(1+.10/1+.04)-1]

As a general rule, when estimating equivalent annual costs, ________ cash flows should be used. a. real b. nominal

A

Interest expenses incurred on debt financing are ______ when computing cash flows from a project. a. ignored b. treated as cash outflows c. spread over the life of the project d. treated as cash inflows

A

Opportunity costs are classified as ____ costs in project analysis. a. relevant b. intangible c. sunk d. irrelevant

A

Sunk costs are costs that a. have already occurred and are not affected by accepting or rejecting a project. b. relate to other projects of the firm. c. will not contribute to profits in the long run even if a project is accepted. d. cannot be measured.

A

The differences between the IRS and the FASB almost always benefit a. the firm. b. the IRS. c. the FASB.

A

Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset? Select all that apply a. There will be a tax savings if the book value exceeds the sales price. b. Taxes are based on the difference between the purchase price and sales price of the asset. c. Taxes are based on the difference between the book value and the sales price. d. Book value represents the purchase price minus the accumulated depreciation.

A, C, & D

Synergy will ______ the sales of existing products. a. reduce b. increase c. not affect

B

How does depreciation affect the operating cash flows? a. A $1 increase in depreciation expense will increase the operating cash flow by $1. b. Depreciation expense does not affect the operating cash flow. c. Depreciation expense reduces the taxable income and taxes, and increases the operating cash flow. d. Depreciation expense increases the taxable income and taxes, and reduces the operating cash flow.

C

According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent? a. $1,680 b. $420 c. $2,220 d. $960

C [600x(1-.30)+1,800]

What is the equation for determining the real interest rate? a. (Nominal Interest Rate/Inflation Rate) - 1 b. 1+Nominal Interest Rate/1+Inflation Rate c. (1+Inflation Rate/1+Nominal Interest Rate) - 1 d. (1+Nominal Interest Rate/1+Inflation Rate) - 1

D

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.

Opportunity Cost

When analyzing a project, sunk costs ____ incremental cash outflows. a. are not b. are

A

Which of the following are true about allocated costs? a. These costs benefit more than one project. b. These costs are classified as irrelevant costs. c. These costs are classified as sunk costs. d. These costs are allocated to more than one project.

A

What is the depreciation tax shield if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent? a. $240 b. $540 c. $180 d. $360

B (1,800x.30)

Corporate finance techniques generally include the use of ______ while financial accounting stresses ______ numbers. a. cash flows; income b. income; cash flows c. income; earnings d. earnings; expenses

A

In unlevered free cash flow, the word free means that a. the cash flows can be distributed to creditors and shareholders. b. the discount rate for the cash flows will be below the project's internal rate of return. c. the project can be undertaken at no cost to the company. d. the cash flows cannot be distributed to creditors.

A

The rules for depreciating assets for tax purposes are based upon provisions set forth in a. IRS Publication 946. b. SEC Publication 2019. c. 1986 SEC Act. d. 2002 Sarbanes-Oxley Act.

A

True or false: NPV will be the same regardless of whether nominal or real cash flows are used. a. True b. False

A

What is the difference between nominal cash flow and real cash flow? a. Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power. b. Nominal cash flow refers to the cash flow's purchasing power while real cash flow refers to the actual dollars to be received. c. There is no difference between nominal and real cash flow.

A

What is the equation for estimating operating cash flows using the top-down approach? a. OCF = Sales - Costs - Taxes b. OCF = EBIT + Depreciation c. OCF = EBIT - Depreciation + Taxes d. OCF = Sales - Costs

A

What is the winner's curse? a. Winning a job as a result of underbidding. b. Losing a job as a result of underbidding. c. Losing a job as a result of overbidding. d. Winning a job as a result of overbidding.

A

Which of the following is an example of a sunk cost? a. Test marketing expenses b. Cost of equipment purchased specifically for the project c. Bonus to top management based on project success d. Salvage value of equipment

A

Side effects from investing in a project refer to cash flows from. Select all that apply a. erosion effects. b. sunk costs. c. opportunity costs. d. synergy effects.

A & D

All real estate is depreciated a. using the 20-year MACRS class. b. on a straight-line basis. c. using the 30-year MACRS class. d. using the 15-year MACRS class.

B

Firms generally maintain two sets of books, one for the IRS and the other for the purposes of generating financial statements according to the ______. a. Securities and Exchange Commission b. FASB c. New York Stock Exchange d. CRA

B

The book value of an asset can substantially differ from the asset's market value because a. assets can only be sold when the book value is zero. b. the expected economic life and salvage value of the asset are not issues in the calculation of depreciation under current tax law. c. the expected economic life and salvage value of the asset are much higher in the calculation of depreciation under current tax law. d. the same cash flow is used for the asset whether it is sold or kept at the end of the project.

B

True or false: A sunk cost is an example of a relevant incremental cash flow. a. True b. False

B

What is a firm's goal in setting a bid price? a. Maximizing the cost of the bid. b. Determining the lowest price they can profitably charge. c. Determining a price that will guarantee a minimum 20 percent return. d. Submitting the lowest bid.

B

The equivalent annual cost approach a. requires selecting the project with the shortest life. Select all that apply b. puts costs on a per-year basis. c. is useful when comparing projects with different useful lives. d. assumes all projects have the same useful lives.

B & C

Which of the following are needed in order to maintain consistency between cash flows and discount rates? Select all that apply a. Nominal cash flows must be discounted at the real rate. b. Real cash flows must be discounted at the real rate. c. Real cash flows must be discounted at the nominal rate. d. Nominal cash flows must be discounted at the nominal rate.

B & D

Allocated costs arise when a specific expenditure a. exceeds its budgeted amount. b. is difficult to estimate. c. benefits more than one project or division. d. is higher than originally estimated.

C

Assets in the five-year MACRS class are depreciated over ____ years. a. four b. four and a half c. six d. five

C

Erosion will ______ the sales of existing products. a. not affect b. increase c. reduce

C

For capital budgeting, opportunity costs are treated as a. cash inflows. b. irrelevant. c. cash outflows.

C

For capital budgeting, the investment in working capital is assumed to be a. sunk costs. b. ignored in the calculation of total cash flow. c. recovered at the end of the project.

C

In calculating the NPV of a project, only ______ cash flows should be used. a. total b. positive c. incremental d. negative

C

Interest on municipal bonds is a. ignored in both shareholders' and tax books. b. included in taxable income in IRS reporting. c. ignored for tax purposes but included as income for FASB accounting. d. ignored in shareholders' books and treated as income in tax books.

C

The decision to replace an existing machine with a new one will be made it a. the annual cost of the new machine is more than the annual cost of the old machine. b. the total cost of the new machine is less than the annual cost of the old machine. c. the annual cost of the new machine is less than the annual cost of the old machine. d. the annual cost of the old machine is less than the annual cost of the new machine.

C

The equivalent annual cost method for deciding between two machines applies only if a. at least one of the machines will be replaced. b. neither machine will be replaced. c. both machines will be replaced.

C

In unlevered free cash flow, the word unlevered means that a. the cash flows will not be above the project's internal rate of return. b. the cash flows are unrelated to NPV. c. the cash flows are dependent on debt that was used to finance the project. d. the cash flows are independent of any debt that may have been used to finance the project.

D

Interest on municipal bonds is ignored ______ while being treated as income ______. a. by the FASB; for tax purposes b. in the stockholders' books; by the IRS c. by the IRS; for tax purposes d. for tax purposes; by the FASB

D

Opportunity costs are a. the actual expenses incurred by a firm to preserve its market share. b. benefits gained as a result of accepting a particular project. c. the actual expenses of pursuing a specific project. d. benefits lost due to taking on a particular project.

D

The computation of equivalent annual costs is useful when comparing projects with unequal a. initial investments. b. salvage values. c. annual cash flows. d. lives.

D

The net present value technique does not discount earnings because earnings a. change every year. b. are computed only once a year. c. are too hard to estimate. d. do not represent real money.

D

Which of the following correctly describes the relationship between depreciation, income, taxes, and investment cash flows? a. Depreciation expense has no effect on income, taxes, or cash flows. b. As depreciation expense increases, income, taxes, and investment cash flows will all increase. c. As depreciation expense increases, income, taxes, and investment cash flows will all decrease. d. As depreciation expense increases, net income and taxes will decrease, while investment cash flows will increase.

D

Which of the following is the equation for estimating operating cash flows using the tax shield approach? a. OCF = (Sales - Costs) + Deprecation × Tax rate b. OCF = (Sales - Costs) × Tax rate + Depreciation × (1 - Tax rate) c. OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate d. OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation

C

According to the top-down approach, what is the operating cash flow if sales are $200,000, total cash costs are $190,636, and the tax bill is $1,144? a. $7,420 b. $8,680 c. $7,960 d. $8,220

D (200,000-190,636-1,144)