Finance DSM Ch. 8
Atlantic Airlines is considering offering new flight options for travel to South America. They expects sale will be $1,000,000 in the first year. Most of the sales will be to new customers, although they expect that 25% of the sales will come from existing customers. What level of incremental sales is associated with offering the new flight option?
$750,000
An incremental cash flow valuation considers
all project cash flows including cannibalization
Which of the following cash flows should be included in incremental free cash flows?
capital expenditures necessary to fund the new project
The ________________ value is the value of all cash flows beyond the project's forecast horizon
continuation
As a result of the Tax Cuts and Job Act, businesses can carry back current year losses for _____ years on their taxes and may carry forward losses _____.
0; indefinitely
Which of the following is an example of a sunk cost?
Amount spent on a test market
Break-even analysis has numerous applications. For example, we could compute EBIT break-even which is the level of sales where
EBIT is equal to zero
Mega Industries owns property which it has rented for many years. Rather than continuing to rent out the space, they are considering using the building as a production facility for a new product. Which of the following is a relevant opportunity cost that should be considered an incremental cash flow?
Lost facility rental income
A conventional cash flow pattern associated with capital investment projects consists of an initial outflow followed by
a series of inflows
We only want to consider incremental earnings in the capital budgeting process. Incremental earnings are the
additional sales and costs associated with the project
A project is said to break-even when the project's NPV
equals zero
Capital budgeting is the process of
evaluating a firm's investment choices
A common use of break-even analysis is to determine
how many units of sales are needed to cover all costs
Which of the following would NOT be an adjustment to net income when calcuating free cash flow?
income tax expense
When a business undertakes a new project it will often need to invest additional funds in net working capital to cover items such as
increased inventory levels
The relevant cash flows of a project are best described as
incremental cash flows
The most rapid method of depreciation allowed under U.S. tax code is the
modified accelerated cost recovery system
The sale of an ordinary asset for its book value results in
no tax benefit
Sunk costs are
previous cash outflows not relevant to the project decision
A method for evaluating a project that uses a number of possible values for a given variable, such as cash inflows, to assess its impact on the firm's return is
sensitivity analysis
_______________________________ allows us the see how much the NPV changes when the underlying project assumptions change
sensitivity analysis
Which of the following is an example of an externality that will generate relevant cash flows?
the additional sales revenue of complementary products
The tax savings generated due to the ability to expense or depreciate an asset for tax purposes is known as
the depreciation tax shield