Chapter 10

The bonus depreciation in 2019 was ____ percent .

100

Incremental cash flows come about as a ( n ) ____ consequence of taking a project under consideration .

direct

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

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

depreciation

Poplar products is evaluating a piece of machinery . The cost of the machinery is $ 1,700,000 . The machinery will be depreciated over five years . At the end of the project , the equipment will be worth 25 % of its original value . The tax rate is 35 % . What is the after - tax proceeds at the end of the project ?

$ 276,250

Phantom Corporation purchased equipment for $ 50,000 , four years ago . The accumulated depreciation to date is $ 41,360 . If they were able to sell the equipment today for $ 20,000 , what would be the amount of tax due ? Assume the company is in the 34 % tax bracket .

$ 3,862

What is net working capital ?

Current assets minus current liabilities

_____ cash flows come about as a direct consequence of taking a project under consideration .

Incremental

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 .

Which one of the following is the equation for estimating operating cash flows using the tax shield approach ?

OCF = ( Sales - Costs ) x ( 1 - Tax rate ) + Depreciation × Tax rate

What is the equation for estimating operating cash flows using the top - down approach ?

OCF = Sales - Costs - Taxes

When considering Net Working Capital , a project will generally need all of the following , except :

Only long - term assets to get the project started .

Among the three main sources of cash flow , which source of cash flow is the most important and also the most difficult to forecast ?

The operating cash flows from net sales over the life of the project

Cash flows should always be considered on a ( n ) ____ basis .

aftertax

When analyzing a project , sunk costs ____ incremental cash outflows .

are not

Opportunity costs are

benefits lost due to taking on a particular project

When an asset is sold , there will be a tax savings if the ____ value exceeds the sales price .

book

When developing cash flows for capital budgeting , it is ____ to overlook important items .

easy

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

erosion

As depreciation expense ____ , net income and taxes will decrease , while cash flows will _____.

increases ; increase

An asset's class established its ____ for tax purposes .

life

The computation of equivalent annual costs is useful when comparing projects with unequal

lives

Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in ____ are overlooked .

net working capital

To prepare _____ financial statements , we need estimates of quantities such as unit sales , the selling price per unit , the variable cost per unit , and total fixed costs .

pro forma

The accelerated cost ____ system is a depreciation method under U.S. tax law allowing for the accelerated write - off of property under various classifications .

recovery .

Erosion will ____ the sales of existing products .

reduce

Opportunity costs are classified as ____ costs in project analysis .

relevant

The first step in estimating cash flow is to determine the ____ cash flows .

relevant

Opportunity costs are classified as :

relevant costs

The tax saving that results from the depreciation deduction is called the depreciation tax

shield

A calculated NPV of $ 15,000 means that the project is expected to create a positive value for the firm and

should be accepted if there is no capital rationing constraint

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

unequal

The ____ curse says that the lowest bidder is the one who underbid the most .

winner's

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

When analyzing a proposed investment , we ____ include interest paid or any other financing costs ,

won't

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 net _____ capital .

working

Which of the following statements regarding the relationship between book value , sales price , and taxes are true when a firm sells a fixed asset ?

•Book value represents the purchase price minus the accumulated depreciation •There will be a tax savings if the book value exceeds the sales price •Taxes are based on the difference between the book value and the sales price

Which of the following are considered relevant cash flows ? ( Select all that apply . )

•Cash flows from beneficial spillover effects •Cash flows from opportunity costs •Cash flows from erosion effects

Side effects from investing in a project refer to cash flows from

•erosion effects •beneficial spillover effects

According to the 2017 Tax Cuts and Jobs Act , bonus depreciation is phased out after .

2026

The ____-alone principle is the assumption that evaluation of a project may be based on the project's incremental cash flows .

stand

A pro ____ financial statement projects future years ' operations .

forma

Sunk costs are costs that

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

Interest expenses incurred on debt financing are _____ when computing cash flows from a project .

ignored

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

increase

If the tax rate increases , the value of the depreciation tax shield will

increase

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

increase

Identify the three main sources of cash flows over the life of a typical project .

•Cash outflows from investment in plant and equipment at the inception of the project •Net cash flows from salvage value at the end of the project •Net cash flows from sales and expenses over the life of the project

Which of the following are fixed costs ?

•rent on a production facility •cost of equipment

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

Investment in net working capital arises when

•inventory is purchased •credit sales are made •cash is kept for unexpected expenditures

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

•payback period •IRR •NPV

Operating cash flow is a function of

•taxes •earnings before interest and taxes •depreciation

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

1986 Tax Reform Act

Which of the following correctly describes the relationship between depreciation , income , taxes , and investment cash flows ?

As depreciation expense increases , net income and taxes will decrease , while cash flows will increase .

True or false : A sunk cost is an example of a relevant incremental cash flow .

False

True or false : When developing cash flows for capital budgeting , it is easy to overlook important items .

True

OCF is calculated as net income plus depreciation using the _____ approach .

bottom - up

The ____ step is to determine whether cash flows are relevant .

first

The difference between a firm's current assets and its current liabilities is known as the

net working capital

Which of the following is an example of an opportunity cost ?

Rental income likely to be lost by using a vacant building for an upcoming project

Which approach to estimating the operating cash flows uses the following equation ? OCF = ( Sales - Costs ) x ( 1 - Tax rate ) + Depreciation × Tax rate

Tax shield approach

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

True