FRL 3000 ch 10

With cost-cutting proposals, when costs decrease, operating cash flows (decrease/increase).

increase

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

increase

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

aftertax

The bonus depreciation in 2019 was _____ percent.

100

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

1986 Tax Reform Act

Which of the following are fixed costs?

-cost of equipment -rent on a production facility

Investment in net working capital arises when ___.

1. cash is kept for unexpected expenditures 2. credit sales are made 3. inventory is purchased

According to the 2017 Tax Cuts and Jobs Act, bonus depreciation is phased out after _____.

2026

cash flows come about as a direct consequence of taking a project under consideration.

Incremental

While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital?

It is expected to be recovered by the end of the project's life.

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

Lives

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

NPV payback period IRR

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

OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate

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

OCF = Sales - Costs - Taxes

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

Which approach to estimating the operating cash flows uses the following equation? OCF = (Sales − Costs) × (1 − Tax rate) + Depreciation × Tax rate

Tax shield approach

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

Test marketing expenses

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

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

True or false: Cash flows should always be considered on an aftertax basis.

True

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

Opportunity costs are ____.

benefits lost due to taking on a particular project

OCF is calculated as net income plus depreciation using the _____ approach.

bottom-up

What is net working capital?

current assets - current liabilities

To calculate the OCF using the bottom-up approach, add to net income.

depreciation

Operating cash flow is a function of _____.

depreciation earnings before interest and taxes taxes

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

The cash flows of a new project that come at the expense of a firm's existing projects is called

erosion or erosions

The step is to determine whether cash flows are relevant.

first

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

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

increase

As a practical matter, it is easier to (decrease/increase) operating leverage than it is to (decrease/increase) it.

increase decrease

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

net working capital

The difference between a firm's current assets and its current liabilities is known as the _____.

net working capital

The accelerated cost_______ system is a depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications.

recovery

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

The tax saving that results from the depreciation deduction is called the depreciation tax

shield

A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____.

should be accepted if there is no capital rationing constraint

The -alone principle is the assumption that evaluation of a project may be based on the project's incremental cash flows.

stand

Using the top-down approach, OCF is calculated by subtracting costs and from sales.

taxes

True or false: When developing cash flows for capital budgeting, it is easy to overlook important items.

true

The computation of equivalent annual costs is useful when comparing projects with _____ lives.

unequal

The curse says that the lowest bidder is the one who underbid the most.

winner's, winner, or winners

When analyzing a proposed investment, we (will/won't) include interest paid or any other financing costs.

won't

When a firm finances new investments, it may set up accounts payable with suppliers, but the balance that the firm must supply is called the investment in net _____ capital.

working