MGF Chapter 9

Which of the following will correct the effect of depreciation?

Operating Cash Flow = (Revenues - cash expenses) X (1- tax rate) + (tax rate X deprecation) Operating Cash Flow = Net Income + depreciation Operating Cash Flow = After-tax profit + depreciation

Which of the following formulas can be used to ensure that depreciation is not included in a project's operating cash flows?

Operating cash flow = after-tax profit + depreciation Operating cash flow = (revenues - cash expenses) x (1-tax rate) + (tax rate x depreciation) Operating cash flow = revenues - cash expenses - taxes

A benefit or cash flow foregone as a result of an action is called:

an opportunity cost

Which of the items below are the elements which must be included in the calculation of a project's total cash flow?

cash flow from capital investments cash flows from changes in working capital operating cash flow

Incremental cash flow is equal to:

cash flow with project - cash flow without project

To calculate net present value, you need to discount _________.

cash flows

The cash flows brought about at the end of a project are called ________ and ________ be included in a project's cash flow forecasts.

terminal cash flows; should

An opportunity cost arises in a project whenever:

the project uses an existing asset that could have been sold or put to productive use elsewhere

Cash flows from capital investments + operating cash flows + cash flows from changes in working capital =

total cash flow

Indirect effects on cash flows may be positive or negative.

true

A project generates revenues of $5,000, costs of $3,000 and taxes of $700. What is the project's operating cash flow?

$1,300 Rationale: $5000 - $3,000 - $700 = $1,300

Which of the following statements about working capital is correct?

a project may have WC outflows early, changing to inflows as WC is recovered

When calculating NPV, why are cash flows discounted instead of accounting profits?

accounting profits do not recognize project investment expenditures as they occur income statements do not track cash flows using accounting profits gives an inaccurate NPV

The term incremental cash flow can best be defined as:

additional cash flows that will only be earned if the firm proceeds with an investment cash flow with the project minus firm cash flow without the project

A sunk cost is irreversible; sunk costs

do not affect NPV and should be ignored.

True or false: Financing costs like interest and principal payments on borrowed funds must be included in the incremental cash flows for the project.

false

By keeping costs such as interest and principal payments on debt out of project cash flows, you are following a fundamental principle of corporate finance known as the separation of investment and ___________ decisions.

financing

Which of the following are commonly made mistakes that managers make in regard to working capital and forecasting project cash flows?

forgetting about working capital entirely forgetting that working capital is recovered at the end of the project forgetting that working capital may change during the life of the project

Which of the following are true regarding the inclusion of working capital in project cash flows?

invested working capital is recovered by the end of the project recovery of working capital is a cash inflow investment in working capital is a cash outflow investment in working capital may change over the life of the project

The initial capital investment is a cash outflow at the start of the project that includes which of the following types of outflows:

investments in research and marketing required for the project any investment in fixed assets required by the project

The initial capital investment is a cash outflow at the start of the project that includes which of the following types of outflows::

investments in research and marketing required for the project any investment in fixed assets required by the project

Which of the following is true of a project's terminal cash flow?

it may be positive or negative It may be due to the sale of a project asset it may be due to final cleanup or recovery costs it may include recovery of working capital investment

Some examples of indirect effects that could affect incremental cash flows would be:

loss of existing store sales by locating a new store too close by cannibalization of existing product sales by introduction of a new product increased sales of an existing product by release of a complementary product release of a product that will generate sales of replacement parts and services in future years

Which of the following are characteristics of sunk costs?

managers are often influenced by sunk costs they do not affect the project NPV they are past and irreversible cash outflows

The initial capital investment in a project requires a ______ cash flow. The salvage value from a project involves a ________ cash flow.

negative; positive

When calculating___________,____________and___________,recognize investment expenditures when they occur, not according to a depreciation scheudle.

net present value

Land that is used for a manufacturing facility could also be sold. The ____________cost equals the cash that could be realized from selling the land now instead of using it for the manufacturing facility.

opportunity

A project's operating cash flow can be calculated using which of the following equations:

revenues - costs - taxes

Some examples of opportunity costs that should be included in project analysis are:

skilled employees who are moved from an existing project to the new project causing a loss to the existing project the market price of an asset that is committed to the project when it could have been sold for cash

When calculating NPV, the proper time to record investment expenditures is:

when they occur