FIN 3403 Chapter 10 Gunter

Changes in the net working capital requirements: 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. Only affect the initial and final cash flows of a project. D. Are generally excluded from project analysis due to their irrelevance to the total project. E. Are excluded from the analysis as long as they are recovered when the project ends.

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

The top-down approach to computing the operating cash flow: A. Ignores non-cash expenses. B. Applies only if a project affects sales. C. Applies only to cost cutting projects. D. Is equal to sales - costs - taxes + depreciation. E. Is used solely to compute a bid price.

A. Ignores non-cash expenses.

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A. Incremental cash flows. B. Internal cash flows. C. External cash flows. D. Erosion effects. E. Financing cash flows.

A. Incremental Cash Flows

Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock. B. $1,200 paid to repair a machine last year. C. $20,000 project that must be forfeited if another project is accepted. D. $4,500 reduction in current shoe sales if a store commences selling sandals. E. $1,800 increase in comic book sales if a store ceases selling puzzles.

B. $1,200 paid to repair a machine last year.

Dependable Motors just purchased some MACRS 5-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for years 1 to 3, respectively. Which one of the following will correctly give you the book value of this equipment at the end of year 2? A. $216,000 / (1 + .2 + .32) B. $216,000 (1 - .2 - .32) C. $216,000 (.20 + .32) D. [$216,000 (1 - .20)] (1 - .32) E. $216,000 / [(1 + .20)(1 + .32)]

B. $216,000 (1 - .2 - .32)

Which one of the following statements is correct concerning bid prices? A. The bid price is the maximum price that a firm should bid. B. A firm can submit a bid that is higher than the computed bid price and still break even. C. A bid price ignores taxes. D. A bid price should be computed based solely on the operating cash flows of the project. E. A bid price should be computed based on a zero percent required rate of return.

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

Which one of the following statements is correct? A. Project analysis should only include the cash flows that affect the income statement. B. A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a 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.

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

Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis? A. Differing costs with no replacement at end of life. B. Differing lives and planned replacement at end of life. C. Differing lives with no replacement at end of life. D. Differing manufacturers and differing operating costs. E. Differing required returns with no replacement at end of life.

B. Differing lives and planned replacement at end of life

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? A. Loan obtained to finance the project B. Initial investment in inventory to support the project C. Annual depreciation tax shield D. Aftertax salvage value E. Net working capital recovery

B. Initial investment in inventory to support the project

Which one of the following is the depreciation method that allows accelerated write-offs of property under various lifetime classifications? A. IRR B. MACRS C. AAR D. Straight-line to zero E. Straight-line with salvage

B. MACRS

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? A. Underlying Value Principle B. Stand-Alone Principle C. Equivalent Cost Principle D. Salvage Principle E. Fundamental Principle

B. Stand-Alone Principle

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A. Depreciation tax shield. B. Tax due on the salvage value of that asset. C. Current year's operating cash flow. D. Change in net working capital. E. MACRS depreciation for the current year.

B. Tax due on the salvage value of that asset.

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. Both taxes and the interest expense are equal to zero.

B. The interest expense is equal to zero.

A company that utilizes the MACRS system of depreciation: A. Will have equal depreciation costs each year of an asset's life. B. Will have a greater depreciation tax shield in year 2 than in year 1. C. Can depreciate the cost of land. D. Will expense less than the entire cost of an asset. E. Will fully depreciate a MACRS 5-year asset within 5 years.

B. Will have a greater depreciation tax shield in year 2 than in year 1.

Which one of the following would make a mutually exclusive project unacceptable? A. Cash inflow for net working capital at time zero. B. Requiring fixed assets that would have no salvage value. C. An equivalent annual cost that exceeds that of an alternative project. D. Lack of revenue generation. E. A depreciation tax shield that exceeds the value of the interest expense.

C. An equivalent annual cost that exceeds that of an alternative project.

Which one of the following is a project cash inflow? Ignore any tax effects. A. Decrease in accounts payable B. Increase in inventory C. Decrease in accounts receivable D. Depreciation expense based on MACRS E. Equipment acquisition

C. Decrease in accounts receivable

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and 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? A. Internal rate of return. B. Net present value. C. Equivalent annual cost. D. Depreciation tax shield. E. Bottom-up operating cash flow.

C. Equivalent annual cost.

Which one of the following best describes pro forma financial statements? A. Financial statements expressed in a foreign currency. B. Financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales. C. Financial statements showing projected values for future time periods. D. Financial statements expressed in real dollars, given a stated base year. E. Financial statements where all accounts are expressed as a percentage of last year's values.

C. Financial statements showing projected values for future time periods.

Kelley's 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? A. Storing supplies in the same space currently used for materials storage. B. Utilizing the basket manager to oversee wreath production. C. Hiring additional employees to handle the increased workload should the firm accept the wreath project. D. Researching the market to determine if wreath sales might be profitable before deciding to proceed. E. Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt.

C. Hiring additional employees to handle the increased workload should the firm accept the wreath project.

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? A. EBIT + Depreciation B. EBIT - Taxes C. Net income + Depreciation D. (Sales - Costs) (1 - Depreciation) (1- Taxes) E. (Sales - Costs) (1 - Taxes)

C. Net income + Depreciation

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-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) A. Sale price + (Sale price - Book value) T B. Sale price + (Sale price - Book value) (1 - T) C. Sale price + (Book value - Sale price) T D. Sale price + (Book value - Sale price) (1 - T) E. Sale price (1 - T)

C. Sale price + (Book value - Sale price) T

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. Providing both ketchup and mustard for customers' use. B. Repairing the roof of the hot dog stand because of water damage. C. Selling fewer hot dogs because hamburgers were added to the menu. D. Offering French fries but not onion rings. E. Losing sales due to bad weather.

C. Selling fewer hot dogs because hamburgers were added to the menu.

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? A. Moving furniture to provide floor space for the appliances. B. Paying the rent for the store. C. Selling furniture to appliance customers. D. Having the current store manager oversee appliance sales. E. Using the store's billing system for appliance sales.

C. Selling furniture to appliance customers.

Which one of the following costs was incurred in the past and cannot be recouped? A. Incremental. B. Side. C. Sunk. D. Opportunity. E. Erosion

C. Sunk

Which one of the following best describes the concept of erosion? A. Expenses that have already been incurred and cannot be recovered. B.Change in net working capital related to implementing a new project. C. The cash flows of a new project that come at the expense of a firm's existing cash flows. D. The alternative that is forfeited when a fixed asset is utilized by a project. E. The differences in a firm's cash flows with and without a particular project.

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

The bid price always assumes which one of the following? A. A project has a one-year life. B. The aftertax net income of the project is zero. C. The net present value of the project is zero. D. Any assets purchased will have a positive salvage value at the end of the project. E. Assets will be depreciated based on MACRS.

C. 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 five-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. Given this, which one of the following statements is correct? A. As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B. The new machine will have a zero rate of return. C. The new machine will generate positive operating cash flows. D. The new machine will create a cash outflow when the firm disposes of it at the end of its life. E. The new machine creates erosion effects.

C. The new machine will generate positive operating cash flows.

The depreciation tax shield is best defined as the: A. Amount of tax that is saved when an asset is purchased. B. Tax that is avoided when an asset is sold as salvage. C. Amount of tax that is due when an asset is sold. D. Amount of tax that is saved because of the depreciation expense. E. Amount by which the aftertax depreciation expense lowers net income.

D. Amount of tax that is saved because of the depreciation expense.

Net Working Capital: A. Can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. Requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. Is rarely affected when a new product is introduced. D. Can create either an initial cash inflow or outflow. E. Is the only expenditure where at least a partial recovery can be made at the end of a project.

D. Can create either an initial cash inflow or outflow.

Decreasing which one of the following will increase the acceptability of a project? A. Sunk costs. B. Salvage value. C. Depreciation tax shield. D. Equivalent annual cost. E. Accounts payable requirement.

D. Equivalent annual cost.

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. Sunk B. Total C. Variable D. Incremental E. Fixed

D. Incremental

The operating cash flow for a project should exclude which one of the following? A. Taxes. B. Variable costs. C. Fixed costs. D. Interest expense. E. Depreciation tax shield.

D. Interest expense.

Which one of the following should not be included in the analysis of a new product? A. Increase in accounts payable for new product inventory purchases. B. Reduction in sales for a current product once the new product is introduced. C. Market value of a machine owned by the firm which will be used to produce the new product. D. Money already spent for research and development of the new product. E. Increase in accounts receivable needed to finance sales of the new product.

D. Money already spent for research and development of the new product.

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? A. Salvage value. B. Wasted value. C. Sunk cost. D. Opportunity cost. E. Erosion.

D. Opportunity Cost

P.A. Petroleum just purchased some equipment at a cost of $67,000. The equipment is classified as MACRS 5-year property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. What is the proper methodology for computing the depreciation expense for year 2? A. $67,000 (1 - .20) .32 B. $67,000 / (1 - .20 - .32) C. $67,000 (1 + .32) D. $67,000 (1 - .32) E. $67,000 .32

E. $67,000 .32

Which one of the following will increase a bid price? A. A decrease in the fixed costs. B. A reduction in the net working capital requirement. C. A reduction in the firm's tax rate. D. An increase in the salvage value. E. An increase in the required rate of return.

E. An increase in the required rate of return.

The operating cash flow of a cost-cutting project: A. Is equal to the depreciation tax shield. B. Is equal to zero because there is no incremental sales. C. Can only be analyzed by projecting the sales and costs for a firm's entire operations. D. Includes any changes that occur in the current accounts. E. Can be positive even though there are no sales.

E. Can be positive even though there are no sales.

The equivalent annual cost considers all of the following except the: A. Required rate of return. B. Operating costs. C. Need for replacement. D. Economic life. E. Costs of research conducted to identify equipment choices.

E. Costs of research conducted to identify equipment choices.

The net 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.

E. Decrease slower under straight-line depreciation than under MACRS.

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? A. Erosion effects B. Taxes C. Fixed Payments D. Salaries E. Depreciation expense

E. Depreciation expense

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? A. Yearly Incremental costs B. Sunk costs C. Opportunity costs D. Erosion costs E. Equivalent annual cost

E. Equivalent annual cost

Pro forma statements for a proposed project should generally do all of the following except: A. Be compiled on a stand-alone basis. B. Include all project-related fixed asset acquisitions and disposals. C. Include all the incremental cash flows related to the project. D. Include taxes. E. Include interest expense.

E. Include interest expense.

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that 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 that 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.

E. Lowest equivalent annual cost.

G & L Plastic Molders spent $1,200 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 $1,200 should be treated as which type of cost? A. Opportunity B. Fixed C. Incremental D. Erosion E. Sunk

E. Sunk

The bid price is: A. An aftertax price. B. The aftertax contribution margin. C. The highest price you should charge if you want to win the bid. D. The only price you can bid if the project is to be profitable. E. The minimum price that will provide your target rate of return.

E. The minimum price that will provide your target rate of return.

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 operating cash flow for mutually exclusive projects ignoring any fixed asset acquisitions or dispositions. C. The minimum price that should be bid to earn a specified rate of return. D. Which one of two investments to accept when the investments have different required rates of return, different costs, and will not be replaced once they wear out. E. Which one of two machines should be purchased when the machines are mutually exclusive, have different lives, and will be replaced at the end of their lives.

E. Which one of two machines should be purchased when the machines are mutually exclusive, have different lives, and will be replaced at the end of their lives.