Ch 6

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 -cash outflows from investment in plant and equipment at the inception of the project -net cash flows from salvage value at the end of the project

If the normal rate is 5 percent and the annual rate of inflation is 2 percent, what is the real rate of return?

2.94%

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 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

It is appropriate to use the approximate formula for estimating the real interest rate when:

The interest rate and inflation rate are low

Discounting is the process of ____.

Calculating the present value of either a lump sum or a series of cash flows.

Corporate finance emphasizes ____ while financial accounting emphasizes ____.

Cash flows, earnings

As depreciation ____, operating cash flows will ____.

Decrease; decrease Increase; increase

True or false: a sunk cost is an example of a relevant incremental cash flows.

False

The shareholders' books in the US follow the rules of the ____.

Financial Accounting Standards Board (FASB)

If sales are made on credit, net working capital will _____.

Increase

____ 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

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

OCF = Sales - Cash Costs - Taxes

Allocated costs must be treated as relevant or incremental costs ____.

Only if the costs being allocated are affected by the proposed project.

Under capital budgeting, required working capital is classified as a cash ____.

Outflow

Management may look ____ to shareholders and pay ____ tax on reported profit.

Profitable, no

As a general rule, when estimating equivalent annual costs, ____ cash flows should be used.

Real

What is the appropriate formula for estimating the real interest rate?

Real interest rate = nominal interest rate - inflation rate

Opportunity costs are classified as:

Relevant costs

Investment in net working capital arises when ____.

cash is kept for unexpected expenditures credit sales are made inventory is purchased

Synergy will _____ the sales of existing products

increase