Intermediate Fin. Mngt. LS 10

The rules for depreciating assets for tax purposes are based upon provisions in the:

1986 Tax Reform Act

Operating cash flow is a function of:

Taxes, Earnings Before Interest and Taxes (EBIT), Depreciation

When evaluating cost cutting proposals, how are operating cash flows affected?

The decrease in costs increases operating income. There is an additional depreciation deduction.

Cash flows should always be considered on a(n) _______________ basis.

after tax

When analyzing a project, sunk costs ____ incremental cash flows.

are not

Side effects from investing in a project refer to cash flows from:

beneficial spillover effects erosion effects

Opportunity costs are:

benefits lost due to taking on a particular project

Incremental cash flows come about as a _____ consequence of taking a project under consideration.

direct

When developing cash flows for capital budgeting, it is _____ to overlook important items.

easy

Sunk costs are costs that ___.

have already occurred and are not affected by accepting or rejecting a project

Net working capital is defined as current assets minus current ______.

liabilities

Once cash flows have been estimated, which of the following investment criteria can be applied to them?

net present value internal rate of return payback period

Accounts receivable and accounts payable are not an issue with project cash flow estimation unless changes in ____ are overlooked.

net working capital

Erosion will ____ the sales of existing products.

reduce

The first step in estimating cash flow is to determine the ________ cash flows.

relevant

Which of the following are fixed costs?

rent on a production facility cost of equipment

According to the ___ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "mini firm".

stand alone

Which of the following is an example of a sunk cost?

test marketing expenses

Investment in net working capital arises when ____.

1) cash is kept for unexpected expenditures 2) inventory is purchased 3) credit sales are made

Identify the three main sources of cash flows over the life of a typical project:

1) net cash flows from salvage value at the end of the project. 2) net cash flows from sales and expenses over the life of the project 3) cash outflows from investment in plant and equipment at the inception of the project

Using your personal savings to invest in your business is considered to have an _____ _____ because you are giving up the use of these funds for other investments or uses, such as vacation or paying off a debt.

opportunity cost