Quiz 3

Depreciation expense

Increasing which one of the following will increase the operating cash flow of a profitable, tax paying company assuming that the bottom-up approach is used to compute the operating cash flow?

Hiring additional employees to handle the increased workload should the firm accept the wreath project

Rey's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

lowest equivalent annual cost.

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the:

minus both the project's change in net working capital and capital spending.

A project's cash flow is equal to the project's operating cash flow:

$216,000(1 − .2 − .32)

Ben Quadinaros Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2?

Decrease in inventory

Which one of the following is a project cash inflow? Ignore any tax effects.

$1,200 paid to repair a machine last year

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

can be positive even though there are no sales.

The operating cash flow of a cost-cutting project:

There are two particularly important considerations. The first is erosion. Will the "essentialized" book displace copies of the existing book that would have otherwise been sold? This is of special concern given the lower price. The second consideration is competition. Will other publishers step in and produce such a product? If so, then any erosion is much less relevant. A particular concern to book publishers (and producers of a variety of other product types) is that the publisher only makes money from the sale of new books. Thus, it is important to examine whether the new book would displace sales of used books (good from the publisher's perspective) or new books (not good). The concern arises any time there is an active market for used product.

A major college textbook publisher has an existing finance textbook. The publisher is debating whether or not to produce an essentialized version, meaning a shorter (and lower-priced) book. What are some of the considerations that should come into play?

Initial investment in inventory to support the project

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Equivalent annual cost

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision?

can create either an initial cash inflow or outflow.

Net working capital:

For tax purposes, a firm would choose MACRS because it provides for larger depreciation deductions earlier. These larger deductions reduce taxes, but have no other cash consequences. Notice that the choice between MACRS and straight-line is purely a time value issue; the total depreciation is the same, only the timing differs.

Not yet graded / 1 pts Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why?

showing projected values for future time periods.

Pro forma financial statements can best be described as financial statements:

Tax due on the current salvage value of that asset

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?

Management's discretion to set the firm's capital structure is applicable at the firm level. Since any one particular project could be financed entirely with equity, another project could be financed with debt, and the firm's overall capital structure remains unchanged. Financing costs are irrelevant in the analysis of a project's incremental cash flows according to the stand-alone principle.

Suppose a financial manager is quoted as saying, "Our firm uses the stand-alone principle. Because we treat projects like mini firms in our evaluation process, we include financing costs because they are relevant." Critically evaluate the statement.

the interest expense is equal to zero.

The bottom-up approach to computing the operating cash flow applies only when:

amount of tax that is saved because of the depreciation expense.

The depreciation tax shield is best defined as the:

incremental cash flows.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.

The equivalent annual cost method is useful in determining:

Interest expense

The operating cash flow for a project should exclude which one of the following?

Opportunity cost

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

ignores noncash expenses.

The top-down approach to computing the operating cash flow:

Selling fewer hot dogs because hamburgers were added to the menu

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Money already spent for research and development of the new product

Which one of the following should not be included in the analysis of a new product?