chapter 10 finance

1. 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.
2. 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? B. stand-alone principle
3. Which one of the following costs was incurred in the past and cannot be recouped? C. sunk
4. 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? D. opportunity cost
5. Which one of the following best describes the concept of erosion? C. the cash flows of a new project that come at the expense of a firm’s existing cash flows
6. Which one of the following best describes pro forma financial statements? C. financial statements showing projected values for future time periods
7. Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications? B. ACRS
8. The depreciation tax shield is best defined as the: D. amount of tax that is saved because of the depreciation expense.
9. 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? E. equivalent annual cost
10. 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? C. hiring additional employees to handle the increased workload should the firm accept the wreath project
11. 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 inventoryII. benefiting from increased furniture sales to appliance customersIII. borrowing money from a bank to fund the appliance projectIV. purchasing parts for inventory to handle any appliance repairs that might be necessary C. I, II, and IV only
12. The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? D. incremental
13. Which one of the following is an example of a sunk cost? B. $1,200 paid to repair a machine last year
14. 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? E. sunk
15. Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? C. selling fewer hot dogs because hamburgers were added to the menu
16. Which of the following should be included in the analysis of a new product?I. money already spent for research and development of the new productII. 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 D. II, III, and IV only
17. 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: E. lowest equivalent annual cost.
18. The bid price is: E. the minimum price you should charge if you want to financially breakeven.
19. Which one of the following will increase a bid price? E. an increase in the required rate of return
20. 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 projectII. loan of $125,000 used to finance the projectIII. depreciation tax shield of $1,100IV. $6,500 of equipment needed to commence the project B. I and IV only
21. Changes in the net working capital requirements: A. can affect the cash flows of a project every year of the project’s life.
22. Which one of the following is a project cash inflow? Ignore any tax effects. C. decrease in accounts receivable
23. Net working capital: D. can create either a cash inflow or a cash outflow at time zero of a project.
24. The operating cash flow of a cost cutting project: E. can be positive even though there are no sales.
25. 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. E. I, II, III, and IV
26. Which one of the following statements is correct? B. A project can create a positive operating cash flow without affecting sales.
27. A company that utilizes the MACRS system of depreciation: B. will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life.
28. Morris Motors just purchased some MACRS 5-year property at a cost of $216,000. Which one of the following will correctly give you the book value of this equipment at the end of year 2? B. $216,000 × (1 – 0.20 – 0.32)
29. 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? E. $67,000 × 0.32
30. 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? B. tax due on the salvage value of that asset
31. The net book value of equipment will: E. decrease slower under straight-line depreciation than under MACRS.
32. Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line 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) C. Sale price + (Book value – Sale price) × T
33. 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? C. NI + D
34. The operating cash flow for a project should exclude which one of the following? D. interest expense
35. The bottom-up approach to computing the operating cash flow applies only when: B. the interest expense is equal to zero.
36. The top-down approach to computing the operating cash flow: A. ignores noncash expenses.
37. 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? E. depreciation expense
38. Which one of the following statements is correct concerning bid prices? B. A firm can submit a bid that is higher than the computed bid price and still break even.
39. 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? C. equivalent annual cost
40. The equivalent annual cost method is useful in determining: E. 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.
41. 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 livesII. differing manufacturersIII. required replacement at end of economic lifeIV. differing initial cost B. I and III
42. The equivalent annual cost considers which of the following?I. required rate of returnII. operating costsIII. need for replacementIV. aftertax salvage value E. I, II, III, and IV
43. The bid price always assumes which one of the following? C. The net present value of the project is zero.
44. Which one of the following would make a project unacceptable? C. an equivalent annual cost that exceeds that of an alternative project
45. Decreasing which one of the following will increase the acceptability of a project? D. equivalent annual cost
46. 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. Given this, which one of the following statements is correct? C. The new machine will generate positive operating cash flows, at least in the first few years of its life.

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