107. AB Mining Company just commissioned a firm to identify if an unused portion of their
mine contains any silver or gold at a cost of $125,000. This is an example of a(n):
108. An asset’s cost plus the amounts you paid for items such as sales tax, freight charges,
and installation and testing fees is referred to as the: ___________________.
109. The process of estimating expected future cash flows of a project using only the relevant
parts of the balance sheet and income statements is referred to as:
110. 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(n):
111. Give an example of each of the following: (a) opportunity cost, (b) substitutionary effect,
(c) complementary effect and (d) sunk cost.
112. Will operating cash flow typically be larger or smaller than net income? Why?
113. How would you compute the equity flotation cost if a firm were going to use a mixture of
retained earnings and new equity to finance a project? Give an example.
114. Everything held constant, would you rather depreciate a project with straight-line
depreciation or with DDB?
115. In a cost-cutting proposal, what might cause you to sometimes have a negative EBIT?
116. When calculating operating cash flow for a project, why would one treat EBIT as a
negative for tax purposes when there is an operating loss?
117. Which of the following expenditures qualify for the Section 179 deduction?
118. To compute and use the Equivalent Annual Cost (EAC) approach of two or more
alternative assets, what would one need?
119. Your company has spent $200,000 on research to develop a new computer game. The
firm is planning to spend $300,000 on a machine to produce the new game. Shipping and
installation costs of the machine will be capitalized and depreciated; they total $25,000. The
machine has an expected life of three years, a $50,000 estimated resale value, and falls under
the MACRS seven-year class life. Revenue from the new game is expected to be $400,000 per
year, with costs of $150,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of
capital of 10 percent, and it expects net working capital to increase by $75,000 at the beginning
of the project. What will the cash flows for this three-year project be?
120. Explain why we use pro forma statements to analyze project cash flows.
121. Identify which cash flows we can incrementally apply to a project and which ones we
cannot.
122. Explain how accelerated depreciation affects project cash flows.
123. How do replacement projects’ cash flows differ from new projects’ cash flows?
124. How is the initial investment adjusted for flotation costs?