Managerial Finance Ch 6.
If sales are made on credit, net working capital will ___
remain the same
Which of the following is an example of an opportunity cost?
rental income likely to be lost by using a vacant building for an upcoming project
Which of the following should be discounted when determining the feasibility of a capital budgeting project(s)?
Cash flows
Firms generally maintain two sets of books, one for the IRS and the other for the purposes of generating financial statements according to the Blank______
FASB
True or false: Opportunity costs can be ignored when determining the financial feasibility of a project.
False
The shareholders' books in the United States follow the rules of the Blank______
Financial Accounting Standards Board (FASB)
________ expenses incurred on debt financing are ignored when computing cash flows from a project.
Interest
Using your personal savings to invest in your business is considered to have an oppurtunity _________ _________ , 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; Cost
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 percent?
$2,220
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
Sunk costs are costs that Blank______
have already occurred and are not affected by accepting or rejecting a project
When interest rates and inflation rates are Blank______, the approximation of the real interest rate becomes Blank______.
high; poor low; good
When comparing projects with unequal lives, one should use which of the following methods Blank______.
equivalent annual costs
An increase in depreciation expense will Blank______ cash flows from operations.
increase
If the inflation rate increases, the nominal rate of interest will Blank______.
increase
Synergy will Blank______ the sales of existing products.
increase
Buying new cost-cutting equipment affects operating cash flows by Blank______.
increasing pretax income increasing the depreciation deduction increasing taxes
investment in net working capital arises when Blank______
inventory is purchased cash is kept for unexpected expenditures credit sales are made
Under capital budgeting, required working capital is classified as a cash Blank______
outflow
Management may look Blank______ to shareholders and pay Blank______ tax on reported profit
profitable; no
As a general rule, when estimating equivalent annual costs, Blank______ cash flows should be used
real
What are the two sets of accounting books?
tax books shareholders' books
It is appropriate to use the approximate formula for estimating the real interest rate when Blank______
the interest rate and inflation rate are low
When a firm evaluates a proposal to make an existing facility more cost-effective, the cost savings must be large enough to justify Blank______
the necessary capital expenditure
True or false: NPV will be the same regardless of whether nominal or real cash flows are used.
true
Sometimes when the low bidder wins the bid on a project, it is because they have underbid the project. In other words, the bid they have submitted probably won't even cover the costs of the project. When this happens, the low bidder is said to suffer from the Blank______.
winner's curse
The bottom-up approach to calculating OCF starts with Blank______.
Net income
What is the approximate formula for estimating the real interest rate?
Real interest rate = Nominal interest rate − Inflation rate
Discounting is the process of Blank______.
calculating the present value of either a lump sum or a series of cash flows
The computation of equivalent annual costs is useful when comparing projects with unequal Blank______.
lives
As a general rule, when estimating equivalent annual costs, Blank______ cash flows should be used.
real
Which of the following is (are) true about allocated costs
-These costs benefit more than one project -These costs are allocated to more than one project.
______ cash flows are the difference between the cash flows of the firm with the project and the cash flows of the firm without the project.
Incremental
Which 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
Opportunity costs are classified as Blank______
Relevant costs
Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of Blank______
accepting a project
Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of Blank______. Multiple choice question.
accepting a project
Opportunity costs are Blank______.
benefits lost due to taking on a particular project
Corporate finance emphasizes Blank______, while financial accounting emphasizes Blank______.
cashflows; earnings
Allocated costs must be treated as relevant or incremental costs Blank______
only if the costs being allocated are affected by the proposed project
When comparing projects with different lives, one should choose the project with the Blank______ equivalent annual cost
lower
When using nominal cash flows, the NPV will be Blank______ when using real cash flows.
the same as
Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?
There will be a tax saving if the book value exceeds the sales price. Taxes are based on the difference between the book value and the sales price. Book value represents the purchase price minus the accumulated depreciation
What is the equation for estimating operating cash flows using the top-down approach?
OCF = Sales − Cash costs − Taxes
At the end of a project, the company sold a machine for $50,000 with a book value of $10,000. Assuming a tax rate of 21 percent, what is the after tax salvage value?
$41,600 ($50,000-$10,000) X.21= $8,400 50,000 - 8400 = 41,600
What is the equation for determining the real interest rate?
1+Nominal Interest Rate/ 1+Inflation Rate − 1
Which of the following 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.
How does depreciation affect the operating cash flows?
Depreciation expense reduces the taxable income and taxes, and increases the operating cash flow.
Identify the three main sources of cash flows over the life of a typical 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. Cash outflows from investment in plant and equipment at the inception of the project.
Depreciation × Tax rate represent the depreciation tax
Shield
When analyzing a project, sunk costs Blank______ incremental cash outflows.
are not
Interest expenses incurred on debt financing are ______ when computing cash flows from a project
ignored
As depreciation Blank______, operating cash flows will Blank______
increases; increase decreases; decrease
When comparing projects with different lives, one should choose the project with the Blank______ equivalent annual cost.
lower
When bidding for a job, a competing firm can use the NPV approach to determine its bid. Once the bid is submitted, the firm will win the contract for the project if their bid is the Blank______
lowest
Which of the following refers to a cash flows purchasing power?
real cash flow
When a firm evaluates a proposal to make an existing facility more cost-effective, the cost savings must be large enough to justify Blank______.
the necessary capital expenditure
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 salvage value of the 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%
Erosion will Blank______ the sales of existing products
reduce