Chapter 10 (Finance)

will have a greater depreciation tax shield in Year 2 than in Year 1.

A company that utilizes the MACRS system of depreciation but does not use bonus depreciation:

Depreciation expense

Assume a profitable, tax-paying company uses the bottom-up approach to compute operating cash flow. An increase in which one of the following items will result in an increase in operating cash flow?

Net income + Depreciation

Assume interest expense is equal to zero. Which one of the following is a correct method for computing the operating cash flow of a project?

Differing lives and planned replacement at end of life

Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis?

The new machine will generate positive operating cash flows.

Ellis-Clay is replacing a machine that has worn out. The replacement machine will not impact sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a tax rate of 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options, and has a positive net income. Given this, which one of the following statements is correct?

decrease slower under straight-line depreciation than under MACRS.

Ignoring bonus depreciation, the net book value of equipment will:

can create either an initial cash inflow or outflow.

Net working capital:

can be positive even though there are no sales.

The operating cash flow of a cost-cutting project:

ignores noncash expenses.

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

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

Which one of the following best describes the concept of erosion?

Selling fewer cookies because ice cream was added to the menu

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

Decrease in inventory

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

A firm can submit a bid that is higher than the computed bid price and still break even.

Which one of the following statements is correct concerning bid prices?

An increase in the required rate of return

Which one of the following will increase a bid price?