FIN 357 Chapter 10
A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____. 1. should be accepted if there is no capital rationing constraint 2. the firm should only accepted if the project has a high payback period 3. it will never cost the firm more than calculated in the cash flow analysis
1. should be accepted if there is no capital rationing constraint
____ cash flows come about as a direct consequence of taking a project under consideration.
Incremental
What is the equation for estimating operating cash flows using the top-down approach?
OCF = Sales - Costs - Taxes
Which of the following is an example of a sunk cost? 1. Salvage value of equipment 2. Test marketing expenses 3. Cost of new equipment 4. Bonus to top management
Test marketing expenses
Cash flows should always be considered on a(n) ___________ basis. Multiple choice question.
aftertax
Opportunity costs are ____.
benefits lost due to taking on a particular project
Incremental cash flows come about as a(n) ________ consequence of taking a project under consideration.
direct
Interest expenses incurred on debt financing are ______ when computing cash flows from a project.
ignored
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
Erosion will ______ the sales of existing products.
reduce
The first step in estimating cash flow is to determine the _________ cash flows.
relevant
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
True or false: When developing cash flows for capital budgeting, it is easy to overlook important items.
true
When analyzing a proposed investment, we (will/won't) include interest paid or any other financing costs.
won't
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
1. IRR 2. payback period 3. NPV
When evaluating cost-cutting proposals, how are operating cash flows affected?
1. The decrease in costs increases operating income. 2. There is an additional depreciation deduction.
Investment in net working capital arises when ___.
1. cash is kept for unexpected expenditures 2. inventory is purchased 3. credit sales are made
Which of the following are fixed costs?
1. rent on a production facility 2. cost of equipment
An increase in depreciation expense will ____ cash flows from operations.
increase
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
With cost-cutting proposals, when costs decrease, operating cash flows (decrease/increase).
increase