FIN: Ch 10 Making Capital Investment Decisions
If the tax rate increases, the value of the depreciation tax shield will _________.
Increase The relationship between the depreciation tax sheild and the tax rate is multiplicative.
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 a s vacation or paying off a debt.
Opportunity Cost
The rules for depreciating assets for tax purposes are based upon provisions in the ______.
1986 Tax Reform Act
Investment in net working capital arises when ___________.
- Cash is kept for unexpected expenditures - Inventory is purchased - Credit sales are made
Which of the following are fixed costs?
- Cost of equipment - Rent on a production facility
Which of the following correctly describes the relationship between depreciation, income, taxes, and investment cash flows?
As depreciation expenses increase, net income and taxes will decrease, while cash flows will increase.
When developing cash flows for capital budgeting, it is ____ to overlook important terms.
Easy
Palmer Corp is choosing between server X and server Y to replace its current equipment. It has gathered the following information: Server Est Life NPV X 2 years ($143,261) Y 3 years ($203,229) If Palmer's required rate of return is 8%, which server should it choose?
Server Y Server X: n = 2 i = 8 PV = -143,261 PMT = ?? ($80,336.36) Server Y: n = 3 i = 8 PV = -203,229 PMT = ?? ($78,859.66)
Which of the following is an example of a sunk cost?
Test marketing expenses
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 top-down approach?
OCF = Sales - Costs - Taxes
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
The computation of equivalent annual costs is useful when comparing projects with unequal __________.
lives
Cash flows should always be considered on a(n) _________ basis.
after-tax
Erosion will ________ the sales of existing products.
reduce
Opportunity costs are classified as ___________ costs in project analysis.
relevant
The first step in estimating cash flow is to determine the __________ cash flows.
relevant
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
According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800 and the tax rate is 30%?
$2,200 Net Income = EBIT -Taxes Bottom-Up Approach is: (NI) + Depr. (600 - 180) + 1800
If a firm's current assets are $150,000, its total assets are $320,000, and its current liabilities are $80,000, what is its net working capital?
$70,000 Answer: $150,000 - $80,000=
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 Top-down Approach: Sales - Costs - Taxes (200,000 - 190,636 - 1,144) = $8,220
Identify the three main sources of cash flows over the life of a typical project.
- Cash outflows from investment in plant and equipment at the inception of the project - Net cash flows are sales and expenses over the life of the project - Net cash flows from salvage value at the end of the project
Operating cash flow is a function of:
- Depreciation - Taxes - Earnings Before Interest and Taxes
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
- Payback period - IRR - NPV
Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?
- Taxes are based on the difference between the book value and sales price - There will be a tax savings if the book value exceeds the sales price - Book value represents the purchase minus the accumulated depreciation
When evaluating cost-cutting proposals, how are operating cash flows affected?
- There is an additional depreciation deduction - The decrease in costs increases operating income
Side effects from investing in a project refer to cash flows from:
- beneficial spillover effects - erosion effects
True of False: A sunk cost is an example of a relevant incremental cash flow
False
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
Incremental cash flows come about as an _________ consequence of taking a project under consideration.
Direct