Chapter 12 Estimating Cash Flows on Capital Budgeting Projects
Answer Key
Multiple Choice Questions
1.
As new capital budgeting projects arise, we must estimate:
2.
Which of these is the process of estimating expected future cash flows of a project using
only the relevant parts of the balance sheet and income statements?
3.
If a firm has already paid an expense or is obligated to pay one in the future, regardless of
whether a particular project is undertaken, that expense is a:
4.
Effects that arise from a new product or service that increase sales of the firm’s existing
products or services are referred to as:
5.
Effects that arise from a new product or service that decrease sales of the firm‘s existing
products or services are referred to as:
6.
Concerning incremental project cash flow, which of these is a cost one would never count
as an expense of the project?
7.
Which of these is used as a measure of the total amount of available cash flow from a
project?
8.
Which of the following is NOT included when calculating the depreciable basis for real
property?
9.
When calculating operating cash flow for a project, one would calculate it as being
mathematically equal to which of the following?
10.
Which of these is the concept that a unit’s sales will follow an approximate bell-shaped
curve versus a steady sales life?
11.
A decrease in net working capital (NWC) is treated as a:
12.
Which of the following is the IRS convention that requires that all property placed in
service during a given period is assumed to be placed in service at the midpoint of that
period?
13.
Accelerated depreciation allows firms to:
14.
Section 179 allows a business, with certain restrictions, to do which of the following?
15.
For which situation below would one need to “smooth out” the variation in each set of
cash flows so that each becomes a perpetuity?
16.
The best approach to convert an infinite series of asset purchases into a perpetuity is
known as the:
17.
One way to account for flotation costs of raising capital is to:
18.
With regard to depreciation, the time value of money concept tells us that:
19.
When looking at which of these types of projects, one must consider any cash flows that
arise from surrendering old equipment before the end of its useful life?
20.
Which of the following measures the operating cash flow a project produces minus the
necessary investment in operating capital, and is as valid for proposed new projects as it
is for the firm’s current operations?
21.
Which statement is true regarding cost-cutting proposals?
22.
Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your
company’s marginal tax rate is 40 percent, what will be the effect on cash flows of this
sale (i.e., what will be the after-tax cash flow of this sale)?
23.
Suppose you sell a fixed asset for $75,000 when its book value is $80,000. If your
company’s marginal tax rate is 35 percent, what will be the effect on cash flows of this
sale (i.e., what will be the after-tax cash flow of this sale)?
24.
Your company is considering a new project that will require $10,000 of new equipment at
the start of the project. The equipment will have a depreciable life of five years and will be
depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital
is 9 percent, and the firm’s tax rate is 34 percent. Estimate the present value of the tax
benefits from depreciation.
25.
Your company is considering a new project that will require $2,000,000 of new equipment
at the start of the project. The equipment will have a depreciable life of 10 years and will
be depreciated to a book value of $250,000 using straight-line depreciation. The cost of
capital is 12 percent, and the firm’s tax rate is 39 percent. Estimate the present value of
the tax benefits from depreciation.
26.
You are trying to pick the least-expensive machine for your company. You have two
choices: machine A, which will cost $50,000 to purchase and which will have OCF of –
$3,500 annually throughout the machine’s expected life of three years; and machine B,
which will cost $75,000 to purchase and which will have OCF of -$4,900 annually
throughout that machine’s four-year life. Both machines will be worthless at the end of
their life. If you intend to replace whichever type of machine you choose with the same
thing when its life runs out, again and again out into the foreseeable future, and if your
business has a cost of capital of 14 percent, which one should you choose?
27.
You are trying to pick the least-expensive machine for your company. You have two
choices: machine A, which will cost $100,000 to purchase and which will have OCF of –
$7,000 annually throughout the machine’s expected life of three years; and machine B,
which will cost $125,000 to purchase and which will have OCF of -$2,600 annually
throughout that machine’s four-year life. Both machines will be worthless at the end of
their life. If you intend to replace whichever type of machine you choose with the same
thing when its life runs out, again and again out into the foreseeable future, and if your
business has a cost of capital of 15 percent, which one should you choose?
28.
You are evaluating two different machines. Machine A costs $10,000, has a five-year life,
and has an annual OCF (after tax) of -$2,500 per year. Machine B costs $15,000, has a
seven-year life, and has an annual OCF (after tax) of -$2,000 per year. If your discount
rate is 14 percent, using EAC which machine would you choose?
29.
You are evaluating two different machines. Machine A costs $25,000, has a five-year life,
and has an annual OCF (after tax) of -$6,000 per year. Machine B costs $30,000, has a
seven-year life, and has an annual OCF (after tax) of -$5,500 per year. If your discount
rate is 10 percent, using EAC which machine would you choose?
