Chapter 10 Practice Problems

The rules for depreciating assets for tax purposes are based upon provisions in the ___.

1986 Tax Reform Act

Decreasing which one of the following will increase the acceptability of a project

Equivalent annual cost

An increase in depreciation expense will ____ cash flows from operations.

Increase it will decrease taxes paid

The stand-alone principle advocates that project analysis should be based solely on which one ofthe following costs?

Incremental

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

Incremental Cash Flows

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

Interest Expense

While making capital budgeting decisions, which of the following sentence is true regarding the initial investment of net working capital?

It is expected to be recovered by the end of the project's life.

Once cash flows have been estimated, which of the following investment criteria can be applied to them?

NPV IRR payback period

A furniture store is considering adding kitchen appliances to its offerings. Which one of thefollowing is the best example of an incremental cash flow related to the appliances?

Selling furniture to appliance customers

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?

Tax due on the current salvage value of that asset

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

Test marketing expenses

When evaluating cost-cutting proposals, how are operating cash flows affected?

The decrease in costs increases operating income. There is an additional depreciation deduction.

True or false: Cash flows should always be considered on an aftertax basis.

True

What is net working capital?

current assets - current liabilities

To calculate the OCF using the bottom-up approach, add ____ to net income

depreciation

Operating cash flow is a function of

depreciation taxes earnings before interest and taxes

Sunk costs are costs that ____.

have already occurred and are not affected by accepting or rejecting a project

Erosion will ______ the sales of existing products.

reduce

According to the _________ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."

stand-alone

Using the top-down approach, OCF is calculated by subtracting costs and____from sales.

taxes

When a firm finances new investments, it may set up accounts payable with suppliers, but the balance that the firm must supply is called

the investment in NWC

The computation of equivalent annual costs is useful when comparing projects with _____ lives.

unequal

Korporate Classics Corporation (KCC) won a bid to supply widgets to Pacer Corporation but lost money on the deal because they underbid the project. KCC fell victim to the _____.

winner's curse

Opportunity costs are classified as ______ costs in project analysis.

relevant

With cost-cutting proposals, when costs decrease, operating cash flows

increases

Which of the following are fixed costs?

rent on a production facility cost of equipment