Chapter 09 Test bank – Static Key
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 those that represent additional expense.
7.
A reduction in working capital increases 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.
If a firm sells an asset for more than its value in the IRS’s books, the resulting net cash flow will be less than the sales price.
11.
When a firm makes an investment in working capital, the cash is usually recovered later.
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.
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 project cash flows 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 considering the introduction of a new product that will require an investment in new machinery. 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 firm invests in a 7-year project that requires the purchase of a $135,000 machine tool. This will be depreciated using 5–
year MACRS and will have no salvage value. When will this equipment affect the project’s tax payments?
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 using this machine?
34.
Which one of the following changes in working capital is least likely if sales increase?
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.
In which of the following cases will a cash investment in net working capital be most likely?
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 expenditure on 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 in year 5 of a project. If this extra working capital is recovered when
the project ends in year 6, what is the effect on the project’s net present value, if the cost of capital is 15%?
40.
Investments in working capital:
41.
Changes in net working capital can occur at:
42.
What effect is likely at the end of the life of a project that required a $20,000 investment in net working capital?
43.
Allocations of overheads should not affect a project’s incremental cash flows unless the:
44.
The NPV of an investment proposal becomes negative solely 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?
48.
The likely effect of discounting nominal cash flows with real interest rates will be to:
49.
Your forecast shows $500,000 annually in sales for each of the next 3 years. If your second and third year predictions have
failed to incorporate the 3% expected annual inflation, how far off in total dollar sales is your 3-year forecast?
50.
Which one of the following would be more apt to make an unacceptable project appear acceptable?
51.
Capital budgeting proposals should be evaluated as if the project were financed:
52.
When calculating cash flow from operations, one should:
53.
The recovery of an additional investment in working capital is likely to:
54.
In what manner does depreciation expense affect investment projects?
55.
Given a positive discount rate, which one of the following changes would increase the NPV of a project?
56.
What is the annual depreciation tax shield for a profitable firm in the 30% marginal tax bracket with $100,000 of annual
depreciation expense?
57.
What is the amount of the annual depreciation tax shield for a firm with $200,000 in net income, $75,000 in depreciation
expense, and a 35% marginal tax rate?
58.
What is the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35%
marginal tax rate?
59.
A tax shield is equal to the reduction in a firm’s: