FIN 3403 Chapter 10 Smartbook

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

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

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

*Cash flows 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

According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 30?

$2,220 OCF+ Net Income + Depreciation $600 x (1-.30) + $1,800 = $2,220

What is the depreciation tax shield if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent?

$540

If a firm's current assets are $150,000, it's total assets are $320,000, and its current liabilities are $80,000, what is its net working capital?

$70,000 $150,000-$80,000

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

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

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?

$8,220 OCF= Sales-Costs-Taxes 200,000-190,636-1,144

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

1986 Tax Reform Act

Opportunity costs are classified as ____ costs in project analysis.

relevant

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

After-tax

Erosion will ____ the sales of existing products.

Reduce

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

*Beneficial spillover effects *Erosion effects

Which of the following are considered relevant cash flows?

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

Investing in net working capital arises when ____.

*Cash is kept for unexpected expenditures *Inventory is purchased *Credit sales are made

Operating cash flow is a function of:

*Earnings before Interest and Taxes *Depreciation *Taxes

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

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

Opportunity costs are ____.

Benefits lost due to taking on a particular project

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

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

Ignored

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

Increase

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

Increase

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

Lives

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

New working capital

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

OCF+ (Sales-Costs) x (1-Tax rate) + Depreciation x Tax Rate

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

OCF= Sales-Costs-Taxes

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 debt.

Opportunity Cost

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

Relevant

Palmer Corp. is choosing between server X and server Y to replace its current equipment. It has gathered the following information: Server Esti Life NPV X 2 years -143,261 Y 3 years -203,229 If Palmer's required rate of return is 8%, what is the EAC of Server X and Server Y?

Server X: -$80,336.36 Server Y: -$78,859.66

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

are not

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

*NPV *IRR *Payback Period

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

Stand-alone

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:

Winner's curse

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

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

Which of the following are fixed costs?

*rent on a production facility *cost of equipment

What is net working capital?

Current assets minus current liabilities

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

Test marketing expenses