FRL 301 - Chapter 10 Quiz

The operating cash flow for a project should exclude which one of the following? taxes fixed costs variable costs depreciation tax shield interest expense

interest expense

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

$1,200 paid to repair a machine last year

Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS? Year Rate 1 20% 2 32% 3 19.20% 4 11.52% 5 11.52% 6 5.76% $67,000 × 0.32 $67,000/(1 - 0.20 - 0.32) $67,000 × (1 - 0.32) $67,000 × (1 - 0.20) × 0.32 $67,000 × (1 + 0.32)

$67,000 × 0.32

Mason Farms purchased a building for $689,000 eight years ago. Six years ago, repairs were made to the building which cost $136,000. The annual taxes on the property are $11,000. The building has a current market value of $840,000 and a current book value of $494,000. The building is totally paid for and solely owned by the firm. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building? $582,000 $865,000 $953,000 $840,000 $494,000

$840,000

Which one of the following statements is correct? Project analysis should only include the cash flows that affect the income statement. A project can create a positive operating cash flow without affecting sales. Interest expense should always be included as a cash outflow when analyzing a project. 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. The depreciation tax shield creates a cash outflow for a project.

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

Danielle's 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 III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary I, II, III, and IV I and II only III and IV only II, III, and IV only I, II, and IV only

I, II, and IV only

Net working capital: requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. is rarely affected when a new product is introduced. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. can create either a cash inflow or a cash outflow at time zero of a project. is the only expenditure where at least a partial recovery can be made at the end of a project.

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

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? erosion wasted value salvage value opportunity cost sunk cost

opportunity cost

Which one of the following 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 losing sales due to bad weather providing both ketchup and mustard for its customer's use repairing the roof of the hot dog stand because of water damage offering French fries but not onion rings

selling fewer hot dogs because hamburgers were added to the menu

Which one of the following costs was incurred in the past and cannot be recouped? erosion incremental side opportunity sunk

sunk