Chapter 10

22. Which one of the following is a cash inflow? Ignore any tax effects. a. a decrease in accounts payable b. an increase in inventory c. a decrease in accounts receivable d. depreciation expense e. an increase in fixed assets

A decrease in accounts receivable

26. Which one of the following statements is correct? a. Project analysis should only include the cash flows which affect the income statement. b. A project can create a positive operating cash flow without affecting sales. c. For the majority of projects that increase sales, there will be a cash outflow related to net working capital that occurs at the end of the project. d. Interest expense should always be included as a cash outflow when analyzing a project. e. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

A project can create a positive operating cash flow without affecting sales

25. Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to a project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals. a. I and II only b. II and III only c. I, II, and IV only d. II, III, and IV only E. I, II, III, and IV

All

21. Changes in the net working capital: a. can affect the cash flows of a project every year of the project's life. b. only affect the initial cash flows of a project. c. are included in project analysis only if they represent cash outflows. d. are generally excluded from project analysis due to their irrelevance to the total project. e. affect the initial and the final cash flows of a project but not the cash flows of the middle years.

Can affect the cash flows of a project every year of the project's life

42. A project which improves the operating efficiency of a firm but which generates no revenue is referred to as a(n) _____ project. a. sunk cost b. opportunity c. cost-cutting d. erosion e. cashless

Cost-Cutting

31. The book value of equipment will: a. remain constant over the life of the equipment. b. vary in response to changes in the market value. c. decrease at a constant rate when MACRS depreciation is used. d. increase over the taxable life of an asset. e. decrease slower under straight-line depreciation than under MACRS.

Decrease slower under straight line depreciation than under macrs

40. Increasing which one of the following will increase the operating cash flow? a. erosion b. taxes c. fixed expenses d. salaries e. depreciation

Depreciation

34. A project's operating cash flow will increase when: a. the tax rate increases. b. sales decrease. c. interest expense decreases. d. depreciation expense increases. e. earnings before interest and taxes decreases.

Depreciation expense increaases

8. The tax savings generated as a result of a firm's depreciation expense is called the: a. aftertax depreciation savings. b. depreciable basis. c. depreciation tax shield. d. operating cash flow. e. aftertax salvage value.

Depreciation tax shield

9. The annual annuity stream of payments with the same present value as a project's costs is called the project's _____ cost. a. incremental b. sunk c. opportunity d. erosion e. equivalent annual

Equivalent Annual

11. Russell's of Westerfield is a furniture store which is considering offering carpet for sale. Which of the following should be considered incremental cash flows of the project? I. utilizing the credit offered by a carpet supplier to build an initial inventory II. granting credit to a customer so she can purchase carpet and pay for it at a later date III. borrowing money from a bank to fund the carpet project IV. purchasing carpet to hold in inventory a. I and II only b. III and IV only c. I, II, and IV only d. II, III, and IV only e. I, II, III, and IV

I, II, IV

43. Which of the following statements are correct regarding the analysis of a cost-cutting project that has an initial cash outflow for fixed assets? I. The costs shown on the pro forma income statement represent a cash inflow. II. The depreciation expense related to the fixed assets creates a tax shield. III. The project operating cash flow can be computed as (Costs Taxes). IV. The earnings before interest and taxes are equal to the costs. a. I and II only b. III and IV only c. I and III only d. II and IV only e. I, II, and III only

I,II,III

20. All of the following are related to a proposed project. Which should be included in the cash flow at time zero? I. initial inventory increase of $2,500 II. loan of $125,000 to commence a project III. depreciation tax shield of $1,100 IV. initial purchase of $6,500 of fixed assets a. I and II only b. I and IV only c. II and IV only d. I, II, and IV only e. I, II, III, and IV

I,IV

19. Which of the following should be included in the analysis of a project? I. sunk costs II. opportunity costs III. erosion costs IV. noncash expenses a. I and II only b. III and IV only c. II and III only D II, III, and IV only e. I, II, and IV only

II,III,IV

16. Which of the following are examples of erosion? I. the loss of current sales due to increased competition in the product market II. the loss of current sales because your chief competitor just opened a store across the street from your store III. the loss of current sales due to a new product which you recently introduced IV. the loss of current sales due to a new product recently introduced by your competitor a. III only b. III and IV only c. I, III, and IV only d. II and IV only e. I, II, III, and IV

III

39. The top-down approach to computing the operating cash flow: a. ignores all noncash items. b. applies only if a project increases sales. c. can only be used if the entire cash flows of a firm are analyzed. d. is equal to sales costs taxes + depreciation. e. includes the interest expense related to a project.

Ignores all non cash items

35. The cash flows of a project should: a. be computed on a pre-tax basis. b. include all sunk costs and opportunity costs. c. include the effects of erosion. d. be included in the year when the related expense or income is recognized by GAAP. e. include all financing costs related to the project.

Include the effects of erosion

1. The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows. a. incremental b. stand-alone c. after-tax d. net present value e. erosion

Incremental

12. The stand-alone principle advocates that project analysis should focus on _____ costs. a. sunk b. total c. variable d. incremental e. fixed

Incremental

23. Net working capital: a. can be ignored in project analysis because any expenditure is normally recouped by the end of the project. b. requirements generally, but not always, create a cash inflow at the beginning of a project. c. expenditures commonly occur at the end of a project. d. is frequently affected by the additional sales generated by a new project. e. is the only expenditure where at least a partial recovery can be made at the end of a project.

Is Frequently affected by the additional Sales generated by a new project

37. The cash flows of a project should exclude the incremental changes in which one of the following accounts? a. taxes b. accounts payable c. fixed assets d. long-term debt e. depreciation

LTD

17. You are considering the purchase of new equipment. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the: a. longest life. b. highest annual operating cost. c. lowest annual operating cost. d. highest equivalent annual cost. e. lowest equivalent annual cost.

Lowest Equivalent annual cost

7. The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called: a. FIFO. b. MACRS. c. straight-line depreciation. d. sum-of-years depreciation. e. erosion.

MACRS

33. The pre-tax salvage value of an asset is equal to the: a. book value if straight-line depreciation is used. b. book value if MACRS depreciation is used. c. market value minus the book value. d. book value minus the market value. e. market value.

Market Value

18. The bid price is: a. an aftertax price. b. the aftertax contribution margin. c. the highest price you should charge if you want the project. d. the only price you can bid if the project is to be profitable. e. the minimum price you should charge if you want to financially breakeven.

Minimum price you should charge if you want to break evem

24. The operating cash flows for a cost reduction project: a. cannot be computed since there is no incremental sales revenue. b. will equal zero because there will be no incremental sales. c. can only be analyzed if all the sales and expenses of a firm are considered. d. must consider the depreciation tax shield. e. will always be negative values.

Must consider the depreciation tax shield

36. Which one of the following is correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? a. EBIT + D b. EBIT T c. NI + D d. (Sales Costs) (1 D) (1 T) e. (Sales Costs) (1 T)

NI + D

41. Which one of the following creates a tax shield? a. dividend payment b. increase in accounts payable c. decrease in inventory d. noncash expense e. sunk cost

Noncash items

13. Sunk costs include any cost that will: a. change if a project is undertaken. b. be incurred if a project is accepted. c. not change as it was previously incurred and cannot be recouped. d. be paid to a third party and cannot be recouped. e. occur if a project is accepted and once incurred, cannot be recouped

Not change as it was previously incurred and cannot be recouped

4. The most valuable investment given up if an alternative investment is chosen is a(n): a. salvage value expense. b. net working capital expense. c. sunk cost. d. opportunity cost. e. erosion cost.

Opportunity Cost

6. A pro forma financial statement is one that: a. projects future years' operations. b. is expressed as a percentage of the total assets of the firm. c. is expressed as a percentage of the total sales of the firm. d. is expressed relative to a chosen base year's financial statement. e. reflects the past and current operations of a firm.

Projects future year's operations

38. The bottom-up approach to computing the operating cash flow applies only when: a. both the depreciation expense and the interest expense are equal to zero. b. the interest expense is equal to zero. c. the project is a cost-cutting project. d. no fixed assets are required for a project. e. taxes are ignored and the interest expense is equal to zero.

The interest expense is equal to zero

10. Lester's Dairy gathers and processes cow's milk for distribution to retail outlets. Lester's is currently considering processing goat's milk as well. Which one of the following is most apt to be an incremental cash flow related to the goat milk project? a. processing the goat's milk in the same building as the cow's milk b. utilizing the same pasteurizing equipment to process both kinds of milk c. purchasing additional milk jugs to handle the increased volume of milk d. researching the market to ascertain if goat milk sales might be profitable before deciding to proceed e. reducing the projected interest expense by assuming the proceeds of the goat milk sales will reduce the outstanding debt

Purchasing additional milk jugs to handle the increased volume in milk

15. Which one of the following best illustrates erosion as it relates to project analysis? a. providing both ketchup and mustard for your customer's use b. repairing the roof of your hamburger stand because of water damage c. selling less hamburgers because you also started selling hot dogs d. opting to sell french fries but not onion rings e. opting to increase your work force by hiring two part-time employees

Selling Less burgers because you started selling dogs

2. The evaluation of a project based solely on its incremental cash flows is the basis of the: a. future cash flow method. b. stand-alone principle. c. dividend growth model. d. salvage value model. e. equivalent cost principle.

Stand Alone Principle

3. A cost that has already been incurred and cannot be recouped is a(n): a. salvage value expense. b. net working capital expense. c. sunk cost. d. opportunity cost. e. erosion cost.

Sunk Cost

30. The book value of a fixed asset must be used in the computation of which one of the following? a. annual tax shield b. tax due on the sale of a fixed asset c. operating cash flow d. change in net working capital e. MACRS depreciation

Tax due on the sale of a fixed asset

5. Erosion is best described as: a. expenses that have already been incurred and cannot be reversed. b. net working capital expenses. c. the cash flows of a new project that come at the expense of a firm's existing cash flows. d. the next alternative that is forfeited when a fixed asset is utilized for a project. e. the differences in a firm's cash flows with and without a particular project.

The cash flows of a new project that come at the expense of a firm's existing cash flows

44. Which one of the following statements is correct concerning bid prices? a. The competitor who wins the bid is the one who submits the highest bid price. B. The winning bid may be at a price that is below break-even especially if there is a related aftermarket for the product. c. A bid price is computed based on 110 percent of a firm's normal required return. d. A bid price should be computed based solely on the operating cash flows of the proposed project. e. A bid price should be computed based on a zero percent required rate of return.

The winning bid may be at a price that is below break-even especially if there is a related aftermarket for the product.

45. Frederick is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using: a. their internal rates of return. b. both net present value and the internal rate of return. c. their effective annual costs. d. the depreciation tax shield approach. e. the replacement parts approach.

Their Effective annual costs

27. A company which utilizes the MACRS system of depreciation: a. will have equal depreciation costs each year of an asset's life. b. will have a greater tax shield in year two of a project than they would have if the firm had opted for straight-line depreciation. c. can depreciate the cost of land, if they so desire. d. will expense less than the entire cost of an asset over the asset's class life. e. cannot expense any of the cost of a new asset during the first year of the asset's life.

Will have a greater tax shield in year two of a project than they would have if the firm had opted for straight line depreciation

32. The aftertax salvage value = Sales price: a. + (Sales price Book value) T. b. + (Sales price Book value) (1 T). c. (Sales price Book value) T. d. (Sales price Book value) (1 T). e. (1 T).

c

14. You spent $600 last week repairing the brakes on your car. Now, the starter is acting up and you are trying to decide whether to fix the starter or trade the car in for a newer model. In analyzing the starter situation, the $600 you spent fixing the brakes is a(n) _____ cost. a. opportunity b. fixed c. incremental d. erosion e. sunk

sunk

46. The equivalent annual cost method is useful in determining: a. which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. b. the tax shield benefits of depreciation given the purchase of new assets for a project. c. operating cash flows for cost-cutting projects of unequal duration. d. which one of two investments to accept when the investments have different required rates of return. e. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.