FIN SB Ch 10

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.

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

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

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

OCF = Sales - Costs - Taxes

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

erosion

When analyzing a proposed investment, we (will/won't) 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

working capital

Which of the following are fixed costs?

-cost of equipment -rent on a production facility

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.

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

Blank 1: increases Blank 2: increase

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

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

Operating cash flow is a function of _____.

Depreciation, EBIT, Taxes

True or false: Opportunity costs can be ignored when determining the financial feasibility of a project.

F

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

False

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

Incremental

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) × (1 − Tax rate) + Depreciation × Tax rate

Tax shield approach

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

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

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

Test marketing expenses

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

When evaluating cost-cutting proposals, how are operating cash flows affected?

There is an additional depreciation deduction. The decrease in costs increases operating income.

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

True

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

True

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

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

bottom-up

What is net working capital?

current assets - current liabilities

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

direct

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

easy

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

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

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

increase Reason: An increase in depreciation expense will increase cash flows because it will decrease taxes paid.

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

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

net working capital

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

payback period IRR NPV

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

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

stand

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

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

The bonus depreciation in 2019 was _____ percent.

100

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

1986 Tax Reform Act

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

2026

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

aftertax

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

are not

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

erosion effects beneficial spillover effects

Investment in net working capital arises when ___.

1. cash is kept for unexpected expenditures 2. credit sales are made 3. inventory is purchased