Fin3403 Test 3

Which one of the following will increase a bid price?

an increase in the required rate of return

Net working capital

Can create either an initial cash inflow or outflow

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

Net income + Depreciation

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?

Opportunity Cost

Which one of the following best describes pro forma financial statements?

Financial statements showing projected values for future time periods.

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm 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?

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

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct?

The new machine will generate positive operating cash flows

The net book value of equipment will:

Decrease slower under straight-line depreciation than under MACRS.

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

Ignores non-cash expenses

The bid price is:

the minimum price that will provide your target rate of return

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?

Equivalent annual cost

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

$1,200 paid to repair a machine last year

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

A firm can submit a bid that is higher than the computed bid price

Which one of the following statements is correct?

A project can create a positive operating cash flow without affecting sales

Which one of the following is the depreciation method that allows accelerated write-offs of property under various lifetime classifications?

ACRS

The depreciation tax shield is best defined as:

Amount of tax that is saved because of the depreciation expense

Which one of the following would make a mutually exclusive project unacceptable?

An equivalent annual cost that exceeds that of an alternative project

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

Equivalent annual cost

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

Equivalent annual cost

Changes in the net working capital requirements:

Can affect the cash flows of a project every year of the project's life

The operating cash flow of a cost-cutting project:

Can be positive even though there are no sales

The equivalent annual cost considers all of the following except the

Costs of research conducted to identify equipment choices

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

Decrease in accounts receivable

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow?

Depreciation expense

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?

Differing lives and planned replacement at end of life.

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

Incremental

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

Incremental cash flows

The bid price always assumes which one of the following

The net present value of the project is zero

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

Initial investment in inventory to support the project

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

Interest expense

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

Lowest equivalent annual cost

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

Money already spent for research and development of the new product

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)

Sale price + (Book value - Sale price) ×T

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

Selling fewer hot dogs because hamburgers were added to the menu

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?

Selling furniture to appliance customers

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Sunk

Which one of the following costs was incurred in the past and cannot be recouped?

Sunk

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 salvage value of the asset

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

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

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

The interest expense is equal to zero

The equivalent annual cost method is useful in determining:

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

A company that utilizes the MACRS system of depreciation

Will have a greater depreciation tax shield in year 2 than in year 1

Pro forma statements for a proposed project should generally do all of the following except

include interest expense