Finance 10

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 1144.

$8220

Real interest rate

(1+ Nominal Interest Rate/1 + inflation rate) - 1

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

Lives

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

• Synergy effects • Erosion effects

What is true about allocated costs?

• These costs benefit more than one project • These costs are allocated to more than one project.

If the nominal rate is 5 percent and the annual rate of inflation is 2 percent, what is the real rate of return?

2.94%

What is the real interest rate if the nominal annual interest rate is 10 percent and the annual inflation rate is 4 percent?

5.77%

The equivalent annual cost method for deciding between two machines applies only if ____.

Both machines will be replaced

What should be discounted when determining the feasibility of a capital budgeting project(s).

Cash Flows

What is given greater importance in capital budgeting problems in corporate finance?

Cash flows

The net present value technique does not discount earnings because earnings ____

Do not represent real money

Firms usually maintain two sets of books, one for the IRS and the other for the purposes of generating financial statements according to the ___________.

FASB

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

False

The shareholders' books in the US follow the rules of the _____.

Financial Accounting Standards Board (FASB)

Sunk costs are costs that ____.

Have already occurred and are not affected by accepting or rejecting a project

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

Ignored

All real estate is depreciated _____.

On a straight-line basis

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 costs

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

$540

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

What are the two sets of accounting books?

• Shareholders books • Tax books

How does depreciation affect the operating cash flows?

Depreciation expense reduces the taxable income and taxes, and increases the operating cash flow.

OCF

= EBIT -taxes + depreciation or EBIT (1-t) + depreciation

OCF

= Sales - Costs - Taxes

OCF using top-down approach

= Sales - Costs - Taxes

Allocated costs arise when a specific expenditure ____.

Benefits more than one project or division

Opportunity costs are classified as ____ costs in project analysis

Relevant

Assets in the five-year MACRS class are depreciated over ____ years.

Six

What is an example of a sunk cost?

Test marketing expenses

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 from sales and expenses over the life of the project • Net cash flows from salvage value at the end of the project

Investment in net working capital arises when ____.

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

Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of ____.

Accepting a project

What correctly describes the relationship between depreciation, income, taxes, and investment cash flows?

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

True or false: Opportunity costs can be ignored when determining the financial feasibility of a project.

False

Interest on municipal bonds is ______.

Ignored for tax purposes but included as income for FASB accounting.

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

Increase

If the inflation rate increases, the nominal rate of interest ill ______.

Increase

Equation for using tax shield approach

OCF = (Sales - Costs) * (1-t) + Depreciation * TaxRate

A firm should replace a current machine when the annual cost of a new machine is ____ than the annual cost of the current machine.

less

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

Increase

Synergy will ____ the sales of existing products.

Increase

Allocated costs must be treated as relevant or incremental costs ____.

Only if the costs being allocated are affected by the proposed project.

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

True

What is the difference between nominal cash flow and real cash flow?

Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power.

What is the real interest rate if the nominal annual interest rate is 10 percent and the annual inflation rate is 4%.

5.77%

What is considered relevant cash flows?

• Cash flows from opportunity costs • Cash flows from synergy effects • Cash flows from erosion effects

What is true 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 the sales price • Book value represents the purchase price minus the accumulated depreciation • There will be a tax savings if the book value exceeds the sales price.