chap 10 finance

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. internal cash flows. external cash flows. erosion effects. financing cash flows incremental cash flows
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
cost was incurred in the past and cannot be recouped sunk
option that is forgone so that an asset can be utilized by a specific project opportunity cost
best describes the concept of erosion the cash flows of a new project that come at the expense of the firms existing cash flows
best describes pro forma financial statements financial statement showing projected values for future time periods
the depreciation method which allows accelerated write offs of property under various lifetime classifications ACRS
The depreciation tax shield is best defined as the:amount of tax that is saved when an asset is purchased.tax that is avoided when an asset is sold as salvage.amount of tax that is due when an asset is sold.correct amount of tax that is saved because of the depreciation expense.amount by which the aftertax depreciation expense lowers net income. amount of tax that is saved because of the depreciation expense
annual annuity stream of payments that has the same present value as a projects cost equivalent annual cost
stand alone principle advocates that project analysis should be based solely on incremental
sunk cost 1200 paid to repair a machine last year
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
bid price minimum price you should charge if you want to financially breakeven
increases bid price increase in required rate on return
changes in the net working capital requirements can affect the cash flows of a project every year of the projects life
project cash inflow? ignore any tax effects decrease in account receivable
net working capital can create either a cash inflow or a cash inflow at time zero of a project
operating cash flow of a cost cutting project can be positive even though there are no sales
the following is correct a project can create a positive operating cash flow without affecting sales
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
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
net book value equipment decrease slower under straightline depreciation than under MACRS
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
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 inventoryII. benefiting from increased furniture sales to appliance customersIV. purchasing parts for inventory to handle any appliance repairs that might be necessary
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
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 introducedIII. increase in accounts receivable needed to finance sales of the new productIV. market value of a machine owned by the firm which will be used to produce the new product
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
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 projectIV. $6,500 of equipment needed to commence the project
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.
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
method for computing the operating cash flow of aproject assuming that the interest expense is equal to zero NI + D
operating cash flow for a project should exclude which of the following interest expense
bottom up approach to computing the operating cash flow applies only when intrest expense is equal to zero
top down approach to computing the operating cash flow ignore noncash expenses
increasing this will increase the operating cash flow assuring that the bottom up approach is used to compute the operating cash flow depreciation expense
correct concerning bid prices firm can submit a bid that is higher than the computed bid price and still break even.
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
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
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 livesIII. required replacement at end of economic life
The equivalent annual cost considers . required rate of returnII. operating costsIII. need for replacementIV. aftertax salvage value
The bid price always assumes which one of the following The net present value of the project is zero
would make a project unacceptable an equivalent annual cost that exceeds that of an alternative project lack of revenue generation
Decreasing this will increase the acceptability of a project equivalent annual cost
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.

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