Finance 7020 chapter 10

A project typically requires an investment in ..................... during the life of the project. At the termination of a project, this investment is typically recovered. a- net working capital b- working capital c- inventory d- account payables

a- net working capita

A ................. for a capital budgeting project is money the firm has already spent or committed to spend, regardless of whether it accepts the project under consideration. a- sunk cost b- incremental cost c- contingency cost d- project feasibility cost

a- sunk cost

When an asset is sold for more than its book value, taxes should be paid on the gains. The relevant cash flow in capital budgeting is the after-tax salvage value because: a- the relevant cash flow is the one resulting after the sale and tax payment b- the relevant cash flow is the cash flow resulting only from the sale c- the sale of the asset has no impact in the capital budgeting decision d- the sales of an asset is a non-cash event

a- the relevant cash flow is the one resulting after the sale and tax payment

Capital budgeting calls for the evaluation of a project based on its incremental cash flows. a- true b- false

a-True

The incremental cash flow for a project can be defined as the firm's cash flows if the project is undertaken minus the firm cash flows if the project is not undertaken. a- true b- false

a-True

A new project you are reviewing will generate an operating cash flow of $19,000. The project will free up $3,500 in net working capital. Initially, $4,500 will be needed for fixed asset purchases. What is the total cash flow for this project at time zero? a. -$1,000 b. $1,000 c. $8,000 d. $18,000 e. $20,000

a. -$1,000

Freley Enterprises is considering two different development plans for an old building they own and want to restore. The building was purchased five years ago for $237,500. The first plan is to create an executive resort and conference center at an estimated cost of $2.1 million. The second plan is to develop luxury apartments with a total cost of $3.4 million. Of course, there is always the third option, and that is to take the offer they just received of $275,000 and sell the property. Which one of the following values represents the opportunity cost of this project? a- $237,500 b- $275,000 c- $2,337,500 d- $3,637,500

b- $275,000

A reduction in the sales of a current product whenever a new product is introduced by a firm is called: a- a sunk cost b- erosion c- an opportunity cost. d- an additive

b- erosion

.................... for a particular capital budgeting project is a benefit which the firm would forgo if it accepts the project. Therefore, it ...... an incremental cost for the capital budgeting project. a- sunk cost; is not b- opportunity cost; is c- contingency cost; is d- relevant cost; is not

b- opportunity cost; is

A ............... is the impact a capital budgeting project might have on cash flows in another area of the firm. These changes in cash flows ............ incremental cash flows for the project under consideration. a- opportunity cost; are not b- side effect; are c- sunk cost; are d- side effect; are not

b- side effect; are

The .............. principle specifies that incremental cash flows can be analyzed from the perspective of the project, rather than from the perspective of the entire firm. a- incremental cash flows b- stand alone c- separation d- differentiation

b- stand alone

A firm purchases a machine for $60,000, depreciated straight-line to zero over its 5 year life. If the machine is sold at the end of the fourth year for $25,000, what are the after-tax proceeds from the sale, assuming a 40% tax rate? a- $ 21,000 b- $ 23,500 c- $ 19,800 d- $ 25,000

c- $ 19,800

In capital budgeting decisions, managers are only interested in incremental cash flow since these cash flows: a- are used to capture sunk cost too b- are adjusting for any unforeseen changes in the predicted cash flows c- consist of any and all changes in the firm's future cash flows d- are easier to estimate

c- consist of any and all changes in the firm's future cash flows

Relevant cash flows are the ............... which consist of all changes in the firm's cash flows that are a direct consequence of ...................... the project. a- incremental cash flows; rejecting b- positive cash flows; rejecting c- incremental cash flows; accepting d- additional cash flows; rejecting

c- incremental cash flows; accepting

Alfsonso and Sons purchased a new grinding machine 2 years ago at a cost of $390,000. Last year, some revolutionary developments occurred making their machine virtually worthless as it cannot produce products which meet the higher quality standards of the newer machines. If Alfsonso and Sons continues using their current machine, they will lose all their customers. They have not found anyone willing to purchase the machine even at a deeply discounted price. The best description of this machine today is that it is a(n) _____ cost. a- erosion b- rationed c- sunk d- market d- market

c- sunk

The Brick and Mortar Book Shop has decided to sell books on-line. Currently, their greatest sellers are young children's books. On-line, they expect to sell primarily fiction to teenagers. Which one of the following would be an erosion cost related to this decision? a. the fact that on-line sales of young children's books is less than teenage fiction sales b. increased sales of all types of books c. less in-store sales because of the convenience of on-line shopping d. less customers on-line than anticipated

c. less in-store sales because of the convenience of on-line shopping

An automaker is considering adding a new model of car to its product line-up. Which of the following are relevant cash flows for this project? I- the current revenues generated from the sale of its existing models II- the additional revenue generated from the new model III- a portion of the cost of using the company headquarter IV- the lost sales of the other models as a consequence of introducing the new model a- I and II b- II and IV c- I, III and IV d- II, III and IV

d- II, III and IV

A sunk cost ......... incremental to a capital budgeting project, and therefore ............. relevant to the capital budgeting decision. a- is; is not b- is not; is c- is; is d- is not; is not

d- is not; is not

Ghosh & Ghosh purchased some 7-year MACRS property five years ago. What is the current book value of this equipment if the original cost was $89,000? Year 1 2 3 4 5 6 7 8 Percent 14.29 24.49 17.49 12.49 8.93 8.93 8.93 4.45 a. $11,908.20 b. $14,600.50 c. $17,067.67 d. $19,855.90

d. $19,855.90

The Allegheny Company owns a parcel of land which they purchased for $189,000. When they purchased the land, they had it leveled so that it could provide overflow parking for a nearby sports arena. The cost of the leveling was $40,000. To date, the company has received $25,000 of income from parking fees. The company is now considering building a restaurant on this site. The cost of grading the land so that it can be landscaped as they desire for this facility will be $15,000. As it currently exists, thevalue of the land is estimated at $239,000. What value related to the land should be assigned to the restaurant project? a. $204,000 b. $219,000 c. $234,000 d. $254,000

d. $254,000

The incremental cash flows of a project can best be defined as the difference between a firm's _____ with and without the project. a. net worth b. net income c. present cash flows d. future cash flows

d. future cash flows

The net working capital invested in a project is generally: a. a sunk cost. b. an opportunity cost. c. recouped in the first year of the project. d. recouped at the end of the project.

d. recouped at the end of the project.