Chapter 10 Fin 3400

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

1986 tax reform act

Which of the following are considered relevant cash flows?

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

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

False

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

after-tax

Which of the following correctly describes the relationship between depreciation, income, taxes and investment cash flows?

as depreciation decreases, taxes and net income will decrease, while investment cash increases

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

direct

Sunk costs are costs that ___.

have already occurred and are not affected by accepting or rejecting a project

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

increase

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

lives

The first step in estimating cash flow is to determine the ____ cash flows.

relevant

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

Among the 3 main sources of cash flow, which source of cash flow is the most important and most difficult to forecast

the operating cash flows from net sales over the life of the projects

Erosion will ____ the sales of existing products.

to reduce

which of the following are fixed costs

1. cost of equipment 2. rent on a production facility

which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firms sells a fixed asset.

1. taxes are based on the difference between book value and the sales price 2. there will be a tax savings if the book value exceeds the sales price 3. book value represents the purchase price- accumulated depreciation

According to 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

if a firms current assets are 150,000, its TA are 320,000, and its current liabilities are 80,000, what is net working capital.

70,000

Investment in net working capital arises when ____.

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

Networking capital is defined as current assets minus

Current Liabilities

Operating cash flow is a function of

EBIT, Taxes, Depreciation

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

Easy

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

NPV, IRR, Payback period

EAC=

PV of Costs/ annuity factor Annuity factor=(1-(1/1+.%)^n)/.%

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

beneficial spill-overs effeccts erosion effects

Opportunity costs are ______

benefits lost due to taking on a particular project

Tax shield approach

OCF=(Sales- Costs) x (1-T) + Depreciation x T -Particularly useful when the major incremental cash flows are the purchase of equipment and the associated depreciation tax shield i.e., choosing between two different machines

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

OCF=sales-costs-taxes

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

-the decrease in costs, increases income -there is an addition deprecation deduction

The bonus depreciation in 2019 will be

100%

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

Net working capital

top down approach equation

OCF= sales-costs-taxes

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

interest expense incurred on debt financing are ____ when computing cash flows from a project

ignored

KCC won a bid to supply widgets to supply pacer corporation, but lost money on the deal because they underbid the project. KCC fell victim to

winners curse