Chapter 10: making capital investment decisions
OCF is calculated as net income plus depreciation using the _____ approach.
bottom-up
Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in ______________ are overlooked.
net working capital
The difference between a firm's current assets and its current liabilities is known as the _____.
net working capital
The _________ curse says that the lowest bidder is the one who underbid the most.
winner
The bonus depreciation in 2019 was _____ percent.
100
The rules for depreciating assets for tax purposes are based upon provisions in the ___.
1986 Tax Reform Act
According to the 2017 Tax Cuts and Jobs Act, bonus depreciation is phased out after _____.
2026
accelerated cost recover systems (ACRS)
A depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
he following correctly describes the relationship between depreciation, income, taxes, and investment cash flows?
As depreciation expense increases, net income and taxes will decrease, while cash flows will increase.
With cost-cutting proposals, when costs decrease, operating cash flows (decrease/increase).
Blank 1: increase
the following are considered relevant cash flows
Cash flows from erosion effects Cash flows from opportunity costs Cash flows from beneficial spillover effects
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.
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
NPV IRR payback period
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. Cash outflows from investment in plant and equipment at the inception of the project Net cash flows from salvage value at the end of the project
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 following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?
There will be tax savings if the book value exceeds the sales price. Taxes are based on the difference between the book value and the sales price. Book value represents the purchase price minus the accumulated depreciation.
True or false: Cash flows should always be considered on an aftertax basis.
True
Operating cash flow is a function of _____.
earnings before interest and taxes depreciation taxes
To prepare _____ financial statements, we need estimates of quantities such as unit sales, the selling price per unit, the variable cost per unit, and total fixed costs.
pro forma
Opportunity costs are classified as ______ costs in project analysis.
relevant
the following are fixed costs?
rent on a production facility cost of equipment
eriosion
the cash flows of a new project that come at the expense of a firm's existing projects
The tax saving that results from the depreciation deduction is called the depreciation tax _____________
Blank 1: shield
Erosion will ______ the sales of existing products.
Reduce Reason: Erosion will reduce the sales of existing products, resulting in reduction in the cash inflow attributable to the new product.
the following is an example of an opportunity cost?
Rental income likely to be lost by using a vacant building for an upcoming project
the following is an example of a sunk cost?
Test marketing expenses
stand-alone principle
The assumption that evaluation of a project may be based on the project's incremental cash flows
incremental cash flows
The difference between a firm's future cash flows with a project and those without the project
Among the three 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
When an asset is sold, there will be a tax savings if the _________value exceeds the sales price.
book
op-down approach, OCF
calculated by subtracting costs and taxes from Sales
Incremental
cash flows come about as a direct consequence of taking a project under consideration.
Investment in net working capital arises when ___.
cash is kept for unexpected expenditures credit sales are made inventory is purchased
When developing cash flows for capital budgeting, it is _____ to overlook important items.
easy
the ___________ step is to determine whether cash flows are relevant.
first
Interest expenses incurred on debt financing are ______ when computing cash flows from a project.
ignored Reason: When estimating cash flows from a project, we are only concerned with flows that result from the assets of the project. How we paid for those assets is not relevant.
An increase in depreciation expense will ____ cash flows from operations.
increase
If the tax rate increases, the value of the depreciation tax shield will ______.
increase Reason: If the tax rate increases, the value of the depreciation tax shield will increase; the relationship is multiplicative.
The computation of equivalent annual costs is useful when comparing projects with unequal _____.
lives
When a firm finances new investments, it may set up accounts payable with suppliers, but the balance that the firm must supply is called the investment in net ______________ capital
working
The computation of equivalent annual costs is useful when comparing projects with _____ lives.
unequal
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 the _____.
winner's curse
When analyzing a proposed investment, we ______ (will/won't) include interest paid or any other financing costs.
wont
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
True or false: A sunk cost is an example of a relevant incremental cash flow.
False
a pro _________ financial statement projects future years' operations.
Forma
equation for estimating operating cash flows using the tax shield approach?
OCF = (Sales - Costs) × (1 - Tax rate) + Depreciation × Tax rate
sunk cost
a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision
A calculated NPV of $15,000 means that the project is expected to create a positive value for the firm and _____.
should be accepted if there is no capital rationing constraint
opportunity cost
the most desirable alternative given up as the result of a decision