FIN 320 Chap 10

The equivalent annual cost considers

. required rate of return II. operating costs III. need for replacement IV. aftertax salvage value

sunk cost

1200 paid to repair a machine last year

the depreciation method which allows accelerated write offs of property under various lifetime classifications

ACRS

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 the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals.

When using the equivalent annual cost as a basis for deciding which equipment should be purchased the equipment under consideration must fit which two of the following criteria

I. differing productive lives III. required replacement at end of economic life

All of the following are related to a proposed project Which of these should be included in the cash flow at time zero

I. purchase of $1,400 of parts inventory needed to support the project IV. $6,500 of equipment needed to commence the project

Which of the following should be included in the analysis of a new product

II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product

method for computing the operating cash flow of a project assuming that the interest expense is equal to zero

NI + D

The bid price always assumes which one of the following

The net present value of the project is zero

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income.

The new machine will generate positive operating cash flows, at least in the first few years of its life.

the following is correct

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

depreciation tax shield

amount of tax that is saved because of the depreciation expense

would make a project unacceptable

an equivalent annual cost that exceeds that of an alternative project lack of revenue generation

changes in the net working capital requirements

can affect the cash flows of a project every year of the projects life

operating cash flow of a cost cutting project

can be positive even though there are no sales

net working capital

can create either a cash inflow or a cash inflow at time zero of a project

project cash inflow? ignore any tax effects

decrease in account receivable

net book value equipment

decrease slower under straightline depreciation than under MACRS

increasing this will increase the operating cash flow assuring that the bottom up approach is used to compute the operating cash flow

depreciation expense

Decreasing this will increase the acceptability of a project

equivalent annual cost

annual annuity stream of payments that has the same present value as a projects cost

equivalent annual cost

best describes pro forma financial statements

financial statement showing projected values for future time periods

correct concerning bid prices

firm can submit a bid that is higher than the computed bid price and still break even.

top down approach to computing the operating cash flow

ignore noncash expenses

increases bid price

increase in required rate on return

stand alone principle advocates that project analysis should be based solely on

incremental

difference between a firms future cash flows if it accepts a project and the firms future cash flows if it does not accept the project is referred to as the projects

incremental cash flows

bottom up approach to computing the operating cash flow applies only when

intrest expense is equal to zero

bid price

minimum price you should charge if you want to financially breakeven

option that is forgone so that an asset can be utilized by a specific project

opportunity cost

best illustrates erosion as it relates to a hot dog stand located on the beach

selling fewer hot dogs because hamburgers were added to the menu

fact that a proposed project is analyzed based on the projects incremental cash flows is the assumption behind which one of the following principles

stand alone principle

the current book value of a fixed asset that was purchased two years ago is used in the computation of

tax due on selvage value of that asset

best describes the concept of erosion

the cash flows of a new project that come at the expense of the firms existing cash flows

The equivalent annual cost method is useful in determining

which one of two machines should be purchased when the machines are mutually exclusive have different machine lives and will be replaced once they are worn out

a company that utilizes the MACRS system of depreciation

will have a greater tax shield in year two of a project than it would have if the firm had opted for straight line given the same depreciation life

Danielles is a furniture store that is considering adding appliances to its offerings Which of the following should be considered incremental cash flows of this project

I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers IV. purchasing parts for inventory to handle any appliance repairs that might be necessary

Three years ago Knox Glass purchased a machine for a 3 year project The machine is being depreciated straightline to zero over a 5 year period. Today the project ended and the machine was sold Which one of the following correctly defines the aftertax salvage value of that machine (T represents the relevant tax rate)

Sale price + (Book value - Sale price) × T

Dan is comparing three 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 Which one of the following computational methods should Dan use as the basis for his decision

equivalent annual cost

Kelleys Baskets makes handmade baskets for distribution to upscale retail outlets The firm is currently considering making handmade wreaths as well Which one of the following is the best example of an incremental operating cash flow related to the wreath project

hiring additional employees to handle the increased workload should the firm accept the wreath project

operating cash flow for a project should exclude which of the following

interest expense

You are considering the purchase of a new machine 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

lowest equivalent annual cost

G & L Plastic Molders spent 1200 last week repairing a machine This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project When analyzing the proposed project the 1200 should be treated as which type of cost

sunk

cost was incurred in the past and cannot be recouped

sunk