CH 8

According to the bottom-up approach, what is the OCF if EBIT is $600, depreciation is $1,800, and the tax rate is 30 percent?

$2,220

Which of the following are considered relevant cash flows?

- Cash flows from opportunity costs - Cash flows from erosion effects - Cash flows from synergy effects

Which of the following are true about allocated costs?

- These costs are allocated to more than one project. - These costs benefit more than one project.

The equivalent annual cost approach

- is useful when comparing projects with different useful lives. - puts costs on a per-year basis

If the nominal rate is 5 percent and the annual rate of inflation is 2 percent, What is the real rate of return?

2.94%

What is the real interest rate if the nominal annual interest rate is 10 percent and the annual inflation rate is 4 percent?

5.77%

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

Cash flows

How does depreciation affect the operating cash flows?

Depreciation expense reduces the taxable income and taxes, and increases the operating cash flow.

What is a firm's goal in setting a bid price?

Determining the lowest price they can profitably charge.

What is the difference between nominal cash flow and real cash flow?

Nominal cash flow is the actual dollars to be received. Real cash flow refers to the cash flow's purchasing power.

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

OCF = Sales - Costs - Taxes

What are the two sets of accounting books?

Stockholders' books Tax books

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

Test marketing expenses

What is the winner's curse?

Winning a job as a result of underbidding.

Opportunity costs are

benefits lost due to taking on a particular project.

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

______ whether cash flows are expressed in nominal or in real quantities.

is the same

A firm should replace a current machine when the annual cost of a new machine is ____ than the annual cost of the current machine.

less

The actual dollars to be received or paid out is referred to as a

nominal cash flow.

All real estate is depreciated

on a straight-line basis.

For capital budgeting, the investment in working capital is assumed to be

recovered at the end of the project.

Opportunity costs are classified as ____ costs in project analysis.

relevant

Assets in the five-year MACRS class are depreciated over ____ years.

six

The decision to replace an existing machine with a new one will be made if

the annual cost of the new machine is less than the annual cost of the old machine.

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

erosion effects. synergy effects.

The stockholders' books in the U.S. follow the rules of the

Financial Accounting Standards Board (FASB).

The rules for depreciating assets for tax purposes are based upon provisions set forth in

IRS Publication 946.

Corporate finance techniques generally include the use of ______ while financial accounting stresses ______ numbers.

cash flows; income

According to the bottom-up approach, what is the OCF if EBIT is $1,100, depreciation is $2,500, and the tax rate is 35 percent?

$3,215

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

OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate

Allocated costs arise when a specific expenditure

benefits more than one project or division.

For capital budgeting, opportunity costs are treated as

cash outflows.

Adjustments for debt financing are generally reflected in the __________ _________, not the cash flows.

discount rate

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

lives.

According to the top-down approach, what is the operating cash flow if sales are $250,000, total cash costs are $206,514, and the tax bill is $1,638?

$41,848

According to 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

What is the equation for determining the real interest rate?

(1+Nominal Interest Rate) /(1+InflationRate) - 1