ch10 3040

Which of the following describes the "bottom-up" approach to defining operating cash flow?

NI + D

Which one of the following would be considered a use of cash?

Reduction in accounts payable

Which one of the following statements is most likely true?

Accounts payable is normally a cash inflow at the beginning of a project.

Operating cash flow is defined as:

Earnings before interest and taxes plus depreciation minus taxes.

The cash flow from projects for a company is:

The sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project

Which of the following statements regarding operating cash flows is accurate?

Changes in OCF will occur when cost of goods sold changes, all else the same.

By using the tax shield approach for calculating operating cash flows we can:

More readily identify the tax benefits of depreciation.

Billie Jo sent a letter inquiring about the cost of a piece of equipment for a project she is considering. The cost of the stamp to mail this letter is an example of a(n) _____ cost.

Sunk

If a company making only cash sales is considering allowing customer credit, then __________.

receivables will likely increase

When considering mutually exclusive investment projects with different lives that will be replaced once they terminate, it is best to evaluate them using _________________________.

the equivalent annual cost rule

Which of the following would likely NOT cause erosion? I. A gas station owner expands floor space to make room for a convenience store. II. You begin selling coffee in new, small-sized pouches alongside your regular-sized coffee cans. III. You build a Taco Bell just down the street from your McDonalds franchise

I only

Which of the following is true? I. Setting the bid price requires finding the point at which project NPV is zero. II. In a cost-cutting proposal the reduction in costs has the same effect as an increase in sales. III. EAC is used to evaluate mutually exclusive projects with different lives if the projects are expected to be continuously replicated

I, II, and III

Total cash flow from a project is defined as:

Operating cash flow minus capital spending minus the change in net working capital.

The future rental income that could have been earned if a building had not been sold is called a(n) ______ cost.

Opportunity

A company is evaluating the replacement of the office copier. Which of the following should be considered in that evaluation? I. The balance due on the current lease, which will be payable even if the copier is returned. II. The cost of the maintenance contract on the new copier. III. The costs of repairs made today on the existing copier. IV. The selling price of the existing copier.

II and IV only

Sunk costs can be defined as:

The costs that have already been incurred and will not change whether or not a project is accepted.

Which of the following would be considered a use of funds? I. An increase in receivables II. An increase in payables III. An increase in inventory IV. An increase in sales

I and III only

Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,001. There are two options for future use of the land: 1) the land can be sold today for $375,000 on an after-tax basis; 2) your company can destroy the past improvements and build a factory onthe land. In consideration of the factory project, what amount (if any) should the land be valued at?

The after-tax salvage value of $375,000.

Incremental cash flows are defined as

The changes in the firm's future cash flows that are a direct consequence of accepting a project.

Which of the following projects would increase net working capital the most?

Using long-term bank credit to reduce payables.

When we employ ________________ we are evaluating a project on the basis of its incremental cash flows, thereby ignoring the other cash flows of the firm.

the stand-alone principle

Which of the following cause operating cash flow to differ from net income? I. Interest expense II. Taxes III. Depreciation IV. Fixed Costs

I and III only

Your company currently sells oversized golf clubs. The Board of Directors wants you to look at replacing them with a line of supersized clubs. Which of the following is NOT relevant?

$200,000 spent on research and development last year on oversized clubs.

You discover the engine-oil additive your scientists developed three years ago makes a great men's after-shave once diluted properly using certain chemicals. How should you treat the original $125,000 of R&D expenditures that went into developing the engine-oil additive for your present decision regarding whether or not to begin production of the after-shave?

As a sunk cost since the R&D expenditure has no bearing on today's decision.

It is important to identify and use only incremental cash flows in capital investment decisions:

Because ultimately it is the change in a firm's overall future cash flows that matter.

If the corporate tax rate were to increase, one would expect a firm's depreciation tax shield to be which of the following, all else the same?

More valuable.

The financial statements that reflect the projected results of future years' operations are called _______ statements.

Pro forma

Two types of batteries are being considered for use in electric golf carts. Burnout brand has a three year life, while Long-lasting brand has a five year life. You must choose between the two batteries and you expect to replace the brand you ultimately choose continuously. You should:

Take the option with the smaller EAC

Erosion, in a financial sense, is defined as:

The negative impact on the current cash flows from an existing product when a new product is introduced

A new project will cause accounts payable to increase by $35,000, accounts receivable to increase by $40,000 and inventory to decrease by $5,000 Which one of the following statements is true?

The project will not affect net working capital

Which of the following is true regarding project evaluation?

The stand-alone principle calls for evaluation of a project based on its incremental cash flows.

You are to calculate operating cash flow using the following information: sales, net income, depreciation, and net initial investment. If interest expenses are zero, then it would likely be easiest for you to use the _______________________ approach.

bottom-up

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called (the) _______________________.

depreciation tax shield

A firm is considering a project which would increase accounts receivable by $10,000, accounts payable by $35,000, and inventory by $30,001. Which of the following is true?

Net working capital has increased.

The most valuable investment given up if an alternative investment is chosen is a(n):

Opportunity cost.

The evaluation of a project based solely on its incremental cash flows is the basis of the:

Stand-alone principle

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

Erosion costs.

When you set the project NPV equal to zero in calculating a bid price you are:

Finding the price at which you expect to create zero wealth for your shareholders

Your firm sells a machine it purchased two years ago. The selling price was approximately 50% less than the book value of the machine. As a result of this transaction, your firm has a tax benefit

that depends on the composition of the CCA pool to which the asset belongs

The depreciation tax shield is defined as

(Depreciation)(Tc).

In setting the bid price, the firm seeks the price that will cause the project to "breakeven" in a financial sense. The lowest acceptable bid price results in all of the following EXCEPT:

AAR = required return

_________________ would usually represent a net cash inflow at the beginning of a project and an equal net cash outflow upon completion of the project.

An increase in payables

Which of the following is true about net working capital?

Changes in net working capital account for differences between accounting sales and costs and actual cash receipts and payments.

Which of the following can be depreciated for tax purposes? I. Machinery and equipment II. Land III. Buildings

I and III only

The Government has been trying to decide whether or not to purchase any of the new, advanced icebreakers it has developed. One of the arguments in favour of purchasing the ships is that since so much money has been spent on their development it would be a waste of money not to buy them now. What is the major problem with this argument?

It includes sunk costs in the decision-making process.

Big Land Development Co. purchased a tract of land last year for $1.2 million. At that time, the company spent $50,000 in legal fees to have the land rezoned for commercial use and another $175,000 to have the land graded so that it is usable. The company is now trying to decide if they want to build one large retail store on the property or a strip mall consisting of smaller stores. Which of the costs identified above should be included in the project analysis to determine the best use of the property?

None of the identified costs

Project cash flows will increase when:

The projected sales resulting from the project increase

When computing a bid price, the net present value should be set equal to zero because:

The required return is used as the discount rate.

Adaptomatic Corp. has just issued their latest financial statements. The statement of financial position contains the following information. Which one of the following statements is true?

There was no change in net working capital.

A pro forma financial statement is one that __________________________.

projects future years' operations

For a new project, a company plans to invest $15,000 in inventory, $8,000 in accounts receivable and $150,000 in fixed assets with a salvage value of $44,001. Accounts payable will increase by $13,000 when the project starts. Assets are depreciated straight line to zero over the 4-year life of the project. Taxes are 35%. Which one of the following statements is correct concerning the cash flow in year 4?

$8,000 is a cash inflow from accounts receivable.

Which one of the following is the correct method for computing the net cash flow on the sale of a piece of equipment? (Assume that the equipment was the only asset in its CCA pool.)

(Selling price - book value)(1 - Tc)

Your company is considering two different methods of producing its product: purchase production equipment, or contract with a supplier to build the product for them. The methods have differing lives and cash flow streams. You should:

Choose the method that maximizes firm value

Which of the following describe(s) relevant cash flows for the purpose of performing capital budgeting analysis? I. Cash flows must be incremental II. Cash flows must be after-tax III. NI + D IV. Additions to net working capital

I, II, III, and IV

The EAC method for evaluating projects applies when which of the following project characteristics exist? I. The projects are mutually exclusive. II. The projects have different economic lives. III. The projects will be replaced more or less indefinitely

I, II, and III

Which of the following is a proper definition of project cash flow? I. EBIT + D - Taxes - additions to net working capital II. Operating cash flow - additions to net working capital - capital spending III. Operating cash flow - additions to net working capital + recoveries of net working capital IV. Sales - costs - taxes - project capital spending

II only

Which of the following methods for calculating project operating cash flow do (does) NOT require you to add back noncash deductions such as depreciation? I. Bottom-up approach II. Top-down approach III. Tax-shield approach

II only

Which of the following actions would create a source of cash? I. Easing the credit policy on accounts receivable II. Reducing the days sales in inventory III. Slowing the payments made to suppliers IV. Selling existing equipment at 10% less than book value

II, III, and IV only

The __________________ approach for calculating project operating cash flow explicitly measures the depreciation-related tax benefit associated with the investment.

tax shield

The Best Company is reviewing two options for replacing a piece of machinery. The first machine costs $86,500 and has a four-year life. The second machine costs $123,000 and has a six-year life. Neither machine will have a salvage value. The machines will be replaced at the end of their life. What method should be used to determine which machine to purchase?

Equivalent annual cost

The annual annuity stream of payments with the same present value as a project's costs is called the project's:

Equivalent annual cost.

The reduction in the sale of hamburgers when hot dogs are added to a menu is called the _____ cost.

Erosion

Which one of the following statements is true concerning project analysis?

For cost cutting proposals where a decision is being made between two or more pieces of equipment with differing lives, the equivalent annual cost method is considered superior to the net present value method if the equipment is to be replaced at the end of its life.

You are advising a friend who is attempting to decide whether or not to drop one of the courses they are currently enrolled in. If they drop, they will forfeit the money spent on tuition. Which of the following regarding the drop decision is consistent with capital budgeting principles? I. Remaining in the class means you must give up your part-time job. II. The tuition cost for the class was outrageous, $1,000 per credit hour. III. If you drop the class, you can sell the textbook now for $30 at the bookstore.

I and III only

Which of the following are considered cash flows of a project? I. Taxes II. Financing costs III. Sunk costs IV. Opportunity costs

I and IV only

If the only information from the statement of comprehensive income items known to you are net income and depreciation, which of the following methods for calculating project OCF would you use? I. Bottom-up approach II. Top-down approach III. Tax-shield approach

I only

A company owns a building that is totally paid for. This building has been sitting idle for the past three years. Now the company is trying to analyze a project that would include the use of this building. Which of the following costs should be included in that analysis? I. The property taxes paid on the building over the past three years II. The insurance paid on the building over the past three years III. The current market value of the building IV. The cost to survey the lot to construct a drainage pond required for the project

III and IV only

Which of the following would normally be included in the final cash flow of a project that entailed the development and sale of a new product? I. The money spent to advertise the new product II. The money spent to obtain a patent on the new product design III. The recovery of the money spent for inventory related to the project IV. An offer to purchase the patent rights

III and IV only

Which of the following statements regarding cash flow is correct?

Incremental cash flows should include opportunity costs but ignore sunk costs.

The changes in the firm's future cash flows that are a direct consequence of accepting a project are called

Incremental cash flows.

There may be a bias against accepting capital budgeting projects if

Inflation in cash inflow estimation is ignored.

Which of the following statements is NOT accurate regarding pro forma financial statements?

Pro forma statements need only be prepared when applying for a bank loan.

Which of the following describes the "top-down" approach to defining operating cash flow?

S - C - Taxes

Which of the following describes the "tax shield" approach to defining operating cash flow?

S - C) (1 - Tc) + DTc

A cost that has already been paid, or the liability to pay has already been incurred, is a(n):

Sunk cost

Which of the following is NOT considered a relevant, incremental cash flow in capital budgeting analysis?

Sunk costs

You are considering a new project that will require an initial buildup of raw materials inventory. The expected life of the project's equipment is seven years. If all goes as you expect, you will replace the equipment at the end of the seven years. If not, you will terminate the project. You currently believe there is a 50-50 chance of either occurrence. How should you treat the raw material inventory in year seven of your present analysis and why?

Treat it as a cash inflow because the replacement of the machines becomes a new capital budgeting decision at that point