978-0133423822 Chapter 12 Part 1

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Financial Management, 12e (Titman/Keown/Martin)

Chapter 12 Analyzing Project Cash Flows

12.1 Identifying Incremental Cash Flows

1) Incremental cash lows from a project =

A) Firm cash lows without the project plus or minus changes in net income.

B) Firm cash lows with the project plus irm cash lows without the project.

C) Firm cash lows with the project minus irm cash lows without the project.

D) Firm cash lows without the project plus or minus changes in revenue with the project.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

2) Which of the following is NOT one of the categories for a project’s relevant after-tax cash

lows?

A) Financing lows

B) Initial cash outlow

C) Diferential lows over the project’s life

D) Terminal cash low

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

3) Which of the following is NOT part of a project’s initial cash outlow?

A) The asset’s purchase price

B) Funds committed to support increased inventory levels due to expected increased sales

if the irm adopts the project

C) A marketing survey completed last year to determine the project’s feasibility

D) Expenses incurred to install the asset

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

4) Relevant incremental cash lows include

A) sales captured from the irm’s competitors.

B) retained sales that would have been lost to new competing products.

C) incremental sales brought to the irm as a whole.

D) all of the above.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

5) Which of the following is NOT considered in the calculation of incremental cash lows?

A) Depreciation tax shield

B) Sunk costs

C) Opportunity costs

D) Both A and B

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

6) Which of the following cash lows should be included as incremental costs when

evaluating capital projects?

A) Investment in working capital that is directly related to a project

B) Expenses that are incurred in order to modify a irm’s production facility in order to

invest in a project

C) Opportunity costs that are directly related to a project

D) All of the above

Question Status: Revised

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

7) Depreciation expenses afect tax-related cash lows by

A) increasing taxable income, thus increasing taxes.

B) decreasing taxable income, thus reducing taxes.

C) decreasing taxable income, but not altering cash lows since depreciation is not a cash

expense.

D) all of the above.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

8) Which of the following would be considered a termination cash low?

A) The expected salvage value of the asset

B) Any tax payments or refunds associated with the salvage value of the asset

C) Recapture of any investment in working capital that was included as an incremental

cash outlay

D) All of the above

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

9) How is interest expense that is associated with a project treated in the capital budgeting

process?

A) It is treated as a cash outlow when estimating the incremental cash lows associated

with a project.

B) It is built into the discount rate.

C) It is considered a synergistic incremental cash low.

D) Interest expense is not relevant to any capital budgeting decisions.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

10) Which of the following best describe why cash lows are utilized rather than accounting

proits when evaluating capital projects?

A) Deducting interest expense from income and also including it in the discount rate would

result in double counting.

B) Cash lows relect the timing of beneits and costs more accurately than accounting

proits.

C) Cash lows are more stable than accounting proits.

D) Both A and B.

Question Status: Revised

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

11) Which of the following is the best example of an incremental cash inlow/outlow?

A) Cash lows that are achieved by diverting sales from other projects of the irm

B) Cash lows that are associated with the inancing of a project

C) Cash lows that occur a little at a time

D) What the total cash lows will be to the company if the project is undertaken as opposed

to what they would have been if the project had not been undertaken

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

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

A) Overhead costs that are associated with a project

B) Interest expense associated with a project

C) Market study expenses incurred in order to decide if a irm should accept a project

D) Depreciation expenses associated with a project

Question Status: Revised

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

13) Which of the following cash lows should be included as incremental costs when

evaluating capital projects?

A) A new security system will reduce shoplifting losses by $50,000 per year.

B) New equipment associated with the project will increase depreciation expense by

$300,000 per year.

C) Interest on construction loans will increase interest expense by $225,000 per year.

D) The new project will occupy about 5% of the Chief Operating Oicer’s time, so 5% of her

salary should be included.

Question Status: New question

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

14) The calculation of diferential cash lows over a project’s life should include which of

the following?

A) Labor and material savings

B) Additional revenues attributable to the project

C) Investment in net working capital

D) All of the above

Question Status: Revised

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

15) Which of the following cash lows are NOT considered in the calculation of the initial

outlay for a capital investment proposal?

A) Increase in accounts receivable

B) The cost of shipping new equipment

C) The cost of issuing new bonds if the project is inanced by a new bond issue

D) The cost of installing new equipment

Question Status: Revised

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

16) Which of the following expenses should be included when estimating cash lows for

investment projects?

A) Interest expense related to inancing a project

B) Sunk costs

C) Required principal payments related to inancing a project

D) Opportunity costs

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

17) When evaluating Capital Budgeting decisions, which of the following items should NOT

be included in the construction of cash low projections for purposes of analysis?

A) Net salvage value

B) Changes in net working capital requirements

C) Shipping and installation costs

D) All of the above should be included.

Question Status: Revised

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

18) Holding all other variables constant, which of the following would INCREASE net

working capital for given year on a project?

A) Allowing customers less time to pay for purchases

B) Taking longer to pay suppliers

C) Increasing inventory levels

D) Both A and C

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

19) If an investment project would make use of land which the irm currently owns, the

project should be charged with

A) a sunk cost.

B) an opportunity cost.

C) amortization.

D) interest.

Question Status: Revised

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

20) The owner of a convenience store is considering adding a take-out sandwich section to

her oferings. The new activity will occupy 25% of the space and account for 30% of total

revenues. Property insurance on the building is $9,000 per year and will not change

because of the new activity. How much of the insurance premium should be allocated to the

new product line?

A) $2,700

B) $2,475

C) $2,250

D) $0.00

Question Status: Revised

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

21) Mr. Smith included the cost of test marketing before production in the calculation of

the initial outlay. Apparently, Mr. Smith does not understand the concept of

A) side-efect costs.

B) opportunity costs.

C) sunk costs.

D) variable costs.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

22) Sunk costs are a type of incremental cash low that should be included in all capital-

budgeting decisions.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

23) When determining how much overhead cost to include in incremental cash lows for a

capital budgeting decision, the allocation of overhead by the accounting department based

on percentage of space used by a project should always be used.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

24) The pertinent issue for determining whether overhead costs should be part of a

project’s relevant after-tax cash low is whether the project beneits from the overhead

items.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

25) The initial outlay involves the immediate cash outlow necessary to purchase the asset

and put it in operating order.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

26) When replacing an existing asset, the cash inlow associated with the sale of the old

asset and any related tax efects must be considered and accounted for in the analysis.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

27) The initial outlay of an asset does not include installation costs.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

28) In making a capital budgeting decision we only include the incremental cash lows

resulting from the investment decision.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

29) To be conservative, capital budgeting analysis assumes that projects cannot add sales

to existing lines of business.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

30) A company converts space to use as a manufacturing facility. Previously it was rented

to another company as a warehouse. This is an example of a sunk cost.

Question Status: New question

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

31) In measuring cash lows we are interested only in the incremental or diferential after-

tax cash lows that are attributed to the investment proposal being evaluated.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

32) Briely explain why each of the following should or should not be considered in

forecasting incremental cash lows from a project:

a. The cost of building a prototype of a new product to see if it was feasible.

b. Market research suggests that after buying a company’s “smart phone” customers will

begin to buy more of the same company‘s notebook computers.

c. A company decides to use existing space for storage. The company could have rented the

space to another business for $2,500 a month.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

33) Cape Cod Cranberries will inance a new organic juice production facility with a

$10,000,000 bond issue. Interest on the bonds will be $637,500 per year for the life of the

project. Should the interest payments be subtracted from the project’s incremental cash

lows?

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

34) Cape Cod Cranberries is evaluating the introduction of a new line of organic cranberry

products. Market research suggests that approximates 1/3 of sales of the new products will

come at the expense of existing product lines. How should this “cannibalization efect” be

incorporated into the analysis.

Question Status: Previous edition

Objective: 12.1 Identify incremental cash lows that are relevant to project evaluation.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value