Financial Management & Policy - Chapter 10

According the the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 21 percent?

**$2,274 (OCF = net income + depreciation net income = 600 - 600*0.21 = 474 OCF = 474 + 1,800) -$420 -$960 -$1,680

What is the depreciation tax shield if EBIT is $600, depreciation is $1,800, and the tax rate is 21 percent?

**$378 (depreciation tax shield = depreciation*tax) -$180 -$240 -$360

According the the top-down approach, what is the operating cash flow if sales are $200,000, total cash costs are $190,636, and the tax bill is $1,144?

**$8,220 (200,000 - 190,636 - 1,144) -$8,680 -$7,420 -$7,960

The bonus depreciation in 2019 will be:

**100% -20% -50%

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

**OCF = sales - costs - taxes -OCF = net income + depreciation -OCF = (sales - costs)*(1-T) + depreciation*T -OCF = sales - costs

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

false

Using your personal savings to invest in your business is considered to have a(n) _____ _____ because you are giving up the use of these funds for other investments, such as a vacation or paying off a debt

opportunity cost

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

**1986 Tax Reform Act -1986 SEC Act -1986 IRS Act -1986 Sarbanes-Oxley Act

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

**there is an additional depreciation deduction **the decrease in costs increases operating income -the decrease in costs decreases operating income -wages are always reduced in cost-cutting endeavors

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 _____

**winner's curse -winner's blessing -Hamilton's blessing -loser's curse

Which of the following are considered relevant cash flows?

**cash flows from erosion effects **cash flows from opportunity costs **cash flows from beneficial spillover effects -cash flows from sunk costs

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

**OCF = (sales - costs)*(1-T) + depreciation*T -OCF = (sales - costs)*T + depreciation*(1-T) -OCF = (sales - costs)*(1-T) + depreciation -OCF = (sales - costs) + depreciation*T

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 decreases, while cash flows will increase -depreciation expense has no effect on income, taxes, or cash flows -as depreciation expense increases, income, taxes, and cash flows will all decrease -as depreciation expense increases, income, taxes, and cash flows will all increase

What is net working capital?

**current assets minus current liabilities -current assets plus current liabilities -total assets minus total liabilities -current liabilities minus current assets

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

**direct -sporadic -indirect

Operating cash flow is a function of:

**earnings before interest and tax **taxes **depreciation -salvage value of equipment -initial investment in equipment

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

**after-tax -pre-tax -zero-tax -before-tax

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

**NPV **IRR **payback period -YTM -the constant growth dividend discount model

Paimer Corp. is choosing between server X and server Y to replace its current equipment. It has gathered the following information: Server X: estimated life = 2 years, NPV = -$143,261 Server Y: estimated life = 3 years, NPV = -$203,229 If Paimer's required rate of return is 8%, which server should it choose?

**Server Y (EAC of X: PV = -143,261, N = 2, I = 8, PMT/EAC = 80,336.36077 EAC of &: PV = -203,229, N = 3, I = 8, PMT/EAC = 78,859.66303) -both servers have the same EAC -Server X -neither server - they both have negative NPV

Opportunity costs are _____

**benefits lost due to taking on a particular project -the costs incurred by a firm to preserve its market share -the costs of pursuing a specific project -benefits gained as a result of accepting a particular project

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

**easy -impossible -difficult -rare

Erosion will _____ the sales of existing products

**reduce -not affect -increase

The first step is estimating cash flow is to determine the _____ cash flows

**relevant -operating -specious

Which of the following are fixed costs?

**rent on a production facility **cost of equipment -net working capital -inventory costs

Sunk costs are costs that _____

**have already occurred and are not affected by accepting or rejecting a project -relates to other projects of the firm -will not contribute to profits in the long run even if a project is accepted -cannot be measured

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

**ignored -treated as cash inflows -spread over the life of the project -treated as cash outflows

An increase in depreciation expense will _____ cash flows from operations

**increase -not affect -decrease

Investment in net working capital arises when _____

**inventory is purchased **cash is kept for unexpected expenditures **credit sales are made -equipment is purchased using long term debt

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 -it is treated as cash outflow at the end of the project's life -it is treated as sunk cost which will not be recovered -it is not at all considered while making capital budgeting decisions

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

**lives -annual cash flows -salvage values -initial investments

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

**net cash flows from sales and expenses over the life of the 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 -test marketing expenses that have been classified as sunk costs

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

**net working capital -the cost of capital -tax rates -investor sentiment

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 -stand-and-deliver -stand-with -walk-alone

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

**there will be a tax savings if the book value exceeds the sales price **book value represents the purchase minus the accumulated depreciation **taxes are based on the difference between the book value of the sales price -taxes are based on the difference between the purchase price and sale price of the asset