3671 ch6

3 main sources of cash flows over the life of a typical project

1. cash outflows from investment in plant and equipment at the inception of the project 2. net cash flows from sales and expenses over the life of the project 3. net cash flows from salvage value at the end of the project

when analzying a project, sunk costs ___ incremental cash outflows

ARE NOT

top-down approach

OCF = Sales - Costs - Taxes

OCF for tax shield

OCT = (sales - costs) x (1 - tax rate) + depreciation x tax rate

allocated costs must be treated as relevant or incremental costs ______

ONLY IF the costs being allocated are affected by the proposed project

under capital budgeting, opportunity costs are cash ______

OUTflows

Opportunity costs are ____

benefits LOST due to taking on a particular project

Allocated costs arise when a specific expenditure _____

benefits more than one project or divison

which of the following is given greater importance in capital budgeting problems in corporate finance?

cash flows

corporate finance emphasizes ____ while financial accounting emphsizes in _____

cash flows; earnings

Investment in net working capital arises when ____.

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

depreciation x tax rate =

depreication tax shield

(t/f) a sunk cost is an example of a relevant incremental cash flow

false

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

ignored

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

ignored

Interest on municipal bonds is ______.

ignored for tax purposes but included as income for FASB accounting

If sales are made on credit, net working capital will...

increase

Syngery will ____ the sales of existing products.

increase

Buying new cost-cutting equipment affects operating cash flows by:

increasing PRETAX income increasing TAXES Increasing depreciation deduction

_____ expenses incurred on debt financing are ignored when computing cash flows from a prject

interest

when bidding for a job, a competing firm can use the NPV approach to determine their bid. once the bid is submitted, the firm will win the contract for the project if their bid is the:

lowest

The bottom-up approach to calculating OCF starts with:

net income

Eroison will ____ the sales of existing products

reduce

opportunity costs are classified as ____ costs in project analysis.

relevant

what are the two sets of accounting books?

tax and shareholders'

When a firm evaluated a proposal to make an existing facility more cost-effective, the cost savings must be large enough to justify:

the necessary capital expenditure

sometimes when the low bidder wins the bid on a project, it is b/c they have underbid the project. in other words, the bid they have submitted probably won't even cover the costs of the project. when this happens, the low bidder is said to suffer from the:

winner's curse

when comparing projects with unequal lives, one should use...

EAC (equivalent annual costs)

the shareholders' books in the US follow the rules of the _____

FASB (financial accounting standards board)

(t/f) The opportunity costs can be ignored when determining the financial feasibility of a project

False

among the 3 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