FINC 301 Ch 11

General Mills just is undertaking an analysis on a new cereal. The firm realizes that if they come out with a new product it would affect sales of existing products? What is the best course of action for General Mills in this analysis? Treat the reduction of sales from existing cereals as a sunk cost. Ignore the fact that sales of other products will be affected. Include the allocated costs of the new cereal in the sales of the pre-existing products. Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.

Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.

Whenever a project has a negative impact on an existing project's cash flows, then that effect should: be included as a negative revenue amount on the new project's cash flow analysis. be included if the impact is limited to noncash expenditures. be ignored. be ignored if the project is evaluated using the correct cost of capital.

be included as a negative revenue amount on the new project's cash flow analysis.

Which of the following is the best example of a sunk cost? Future payments on a leased building. Historical noncash expenses. Historical research and development costs. Future research and development costs.

Historical research and development costs.

_________ refers to the cash flow that a project is expected to generate after all operating expenses and taxes have been paid. Incremental cash flow from operations Operating income EBITDA None of the above

Incremental cash flow from operations

Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project? Depreciation and amortization. Fixed costs. Sunk costs. Variable costs.

Sunk costs.

Depreciation expense _____. decreases taxable income and decreases taxes increases taxable income and decreases taxes decreases taxable income and increases taxes increases taxable income and increases taxes

decreases taxable income and decreases taxes

Cash flows over a project's life should include _____. dividends paid depreciation and amortization expenses sunk costs interest paid

depreciation and amortization expenses

The cash flows used in capital budgeting calculations are based on: forecasts of retained earnings available for financing projects. forecasts of net income. historical estimates. forecasts of future cash revenues, expenses, and investment outlays.

forecasts of future cash revenues, expenses, and investment outlays.

The proper time to harvest an asset is when the percentage NPV increase of harvesting a project at a future point in time is at the last date where the increase is: greater than the cost of capital. less than the cost of capital. 10 percent greater than the cost of capital. none of the above.

greater than the cost of capital.

The tax rate that should be used when forecasting cash flows from operations is the _____. marginal tax rate total tax rate investment-related tax rate average tax rate

marginal tax rate

The US has a ______________ tax system. flat uniform regressive progressive

progressive

The term free cash flows refers to the fact that: the cash flows are left over after the firm has made the necessary investments in working capital and long-term assets. all financial costs have been deducted from the cash flows. the cash flows have been raised from the firm's retained earnings. the cash flows are not subject to any transactions costs.

the cash flows are left over after the firm has made the necessary investments in working capital and long-term assets.