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1. Capital budgeting analysis focuses on cash flow as opposed to profits.
2. Accurate capital budgeting analysis depends on total cash flows as opposed to
incremental cash flows.
3. Sunk costs influence capital budgeting decisions only when the sunk costs exceed future
cash inflows.
4. Opportunity costs are evaluated for investment decisions at their historical cost.
5. The method of financing a project affects the determination of its cash flows for capital
budgeting purposes.
6. In project analysis, allocations of overhead should be limited to only those that represent
additional expense.
7. If a project permits a reduction in the level of working capital, this reduction is assumed to
increase cash flows.
8. An asset in the MACRS 5-year class life will have depreciation expense in 6 different
years.
9. The present value of the total depreciation tax shield will be higher when an asset uses
MACRS than when depreciated straight-line.
10. The net cash flow from the sale of an asset will exceed the asset's sale price when a firm
has positive taxable income and the asset's book value exceeds its market value.
11. When additional funds must be committed to working capital, those funds are assumed to
be recovered at the end of the project's life.
12. Discounting real cash flows with real interest rates provides an overly optimistic idea of a
project's value.
13. Sunk costs remain the same whether or not you accept the project.
14. Sunk costs do not affect the net present value of a project.
15. Investments in working capital, just like investments in plant and equipment, result in cash
inflows at time zero.
16. A project will always generate extra overhead costs.
17. Discounting real cash flows at a nominal rate is a serious mistake.
18. Suppose you finance a project partly with debt. You should neither subtract the debt
proceeds from the project's required investment, nor would you recognize the interest and
principal payments on the debt as cash outflows.
19. When you finance a project partly with debt, you should still view the project as if it were
all equity-financed, treating all cash outflows required for the project as coming from
stockholders, and all cash inflows as going to them.
20. As a project comes to its end, there is a disinvestment in working capital, which also
generates positive cash flow as inventories are sold off and accounts receivable are collected.
21. The total depreciation tax shield equals the product of depreciation and the tax rate.
22. Cash flow from operations = (revenues - cash expenses) × (1 - tax rate) + (depreciation
× tax rate).
23. Corporate income statements are designed primarily to show:
24. Projects that have negative NPVs should be:
25. If the adoption of a new product will reduce the sales of an existing product, then the
projected sales on the pro forma statement should:
26. Which one of these represents a cash outflow for a project?
27. The rationale for not including sunk costs in capital budgeting decisions is that they:
28. You are evaluating a new project that will introduce a revolutionary new product that will
be produced by a new, highly efficient machine. Which one of these will lower the net present
value of that project?
29. When is it appropriate to include sunk costs in the evaluation of a project?
30. A profitable firm is considering a 7-year project that requires $135,000 of new equipment
which will be depreciated as MACRS 5-year property, after which time it will be worthless. When
will this equipment affect the project's cash flows?
31. The opportunity cost of an asset:
32. Which one of the following is
least
likely to influence the opportunity cost of an asset?
33. Assume your firm has an unused machine that originally cost $75,000, has a book value
of $20,000, and a market value of $25,000. Ignoring taxes, what is the opportunity cost of this
machine?
34. Which one of the following changes in working capital is
least
likely, given an increase in
the overall level of sales?
35. A proposed project requires an initial investment of $8,500 in current assets, 75% of
which will be financed with accounts payable. The project will have:
36. Which one of the following is a situation where a new project will require a cash
investment in net working capital?
37. What is the effect on a firm's net working capital if a new project requires a $30,000
increase in inventory, a $10,000 increase in accounts receivable, a $35,000 increase in machinery,
and a $20,000 increase in accounts payable?
38. A project is expected to increase inventory by $17,000, increase accounts payable by
$10,000, and decrease accounts receivable by $1,000. What is the project's cash flow from net
working capital at time zero?
39. Net working capital is expected to increase by $25,000 over the 5-year life of a project.
What is the effect of net working capital on the project's net present value if the cost of capital is
15%?
40. A project will reduce the amount of inventory that a firm must carry. What effect will this
have on the project's cash flows if all inventory is purchased for cash?
41. Changes in net working capital can occur at:
42. What effect is expected at the end of the life of a project that initially required a $20,000
increase in net working capital?
43. Allocations of overhead should not affect a project's incremental cash flows unless the:
44. The NPV of an investment proposal becomes negative as a result of allocating a portion
of the corporation president's salary. It is most likely the case that:
45. The correct method to handle overhead costs in capital budgeting is to:
46. Which one of the following would
not
be expected to affect the decision of whether to
undertake an investment?
47. Which one of the following methods will provide a correct analysis for capital budgeting
purposes?
