B) False
Correct Answer
verified
Correct Answer
verified
A) Only incremental cash flows,which are the cash flows that would result if a project is accepted,are relevant when making accept/reject decisions.
B) Sunk costs are not included in the annual cash flows,but they must be deducted from the PV of the project's other costs when reaching the accept/reject decision.
C) A proposed project's estimated net income as determined by the firm's accountants,using generally accepted accounting principles (GAAP) ,is discounted at the WACC,and if the PV of this income stream exceeds the project's cost,the project should be accepted.
D) If a product is competitive with some of the firm's other products,this fact should be incorporated into the estimate of the relevant cash flows.However,if the new product is complementary to some of the firm's other products,this fact need not be reflected in the analysis.
E) The interest paid on funds borrowed to finance a project must be included in estimates of the project's cash flows.
G) C) and D)
Correct Answer
verified
Correct Answer
verified
A) All sunk costs that have been incurred relating to the project.
B) All interest expenses on debt used to help finance the project.
C) The investment in working capital required to operate the project,even if that investment will be recovered at the end of the project's life.
D) Sunk costs that have been incurred relating to the project,but only if those costs were incurred prior to the current year.
E) Effects of the project on other divisions of the firm,but only if those effects lower the project's own direct cash flows.
G) C) and D)
Correct Answer
verified
Correct Answer
verified
B) False
Correct Answer
verified
Correct Answer
verified
B) False
Correct Answer
verified
Correct Answer
verified
A) $5,558
B) $5,850
C) $6,143
D) $6,450
E) $6,772
G) A) and E)
Correct Answer
verified
Correct Answer
verified
B) False
Correct Answer
verified
Correct Answer
verified
A) The proposed new project would increase the firm's corporate risk.
B) The proposed new project would increase the firm's market risk.
C) The proposed new project would not affect the firm's risk at all.
D) The proposed new project would have less stand-alone risk than the firm's typical project.
E) The proposed new project would have more stand-alone risk than the firm's typical project.
G) B) and E)
Correct Answer
verified
Correct Answer
verified
B) False
Correct Answer
verified
Correct Answer
verified
B) False
Correct Answer
verified
Correct Answer
verified
A) If the building could be sold,then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
B) This is an example of an externality,because the very existence of the building affects the cash flows for any new project that Rowell might consider.
C) Since the building was built in the past,its cost is a sunk cost and thus need not be considered when new projects are being evaluated,even if it would be used by those new projects.
D) If there is a mortgage loan on the building,then the interest on that loan would have to be charged to any new project that used the building.
E) Since the building has been paid for,it can be used by another project with no additional cost.Therefore,it should not be reflected in the cash flows for any new project.
G) All of the above
Correct Answer
verified
Correct Answer
verified
A) Increase the estimated NPV of the project to reflect its greater risk.
B) Reject the project,since its acceptance would increase the firm's risk.
C) Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
D) Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.
E) Increase the estimated IRR of the project to reflect its greater risk.
G) B) and C)
Correct Answer
verified
Correct Answer
verified
B) False
Correct Answer
verified
Correct Answer
verified
A) Revenues from an existing product would be lost as a result of customers switching to the new product.
B) Shipping and installation costs associated with a machine that would be used to produce the new product.
C) The cost of a study relating to the market for the new product that was completed last year.The results of this research were positive,and they led to the tentative decision to go ahead with the new product.The cost of the research was incurred and expensed for tax purposes last year.
D) It is learned that land the company owns and would use for the new project,if it is accepted,could be sold to another firm.
E) Using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product.This space could be used for other products if it is not used for the project under consideration.
G) A) and C)
Correct Answer
verified
Correct Answer
verified
A) Since depreciation is a non-cash expense,the firm does not need to deal with depreciation when calculating the operating cash flows.
B) When estimating the project's operating cash flows,it is important to include both opportunity costs and sunk costs,but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process.
C) Capital budgeting decisions should be based on before-tax cash flows.
D) The cost of capital used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.
E) In calculating the project's operating cash flows,the firm should not deduct financing costs such as interest expense,because financing costs are accounted for by discounting at the cost of capital.If interest were deducted when estimating cash flows,this would,in effect,"double count" it.
G) A) and B)
Correct Answer
verified
Correct Answer
verified
A) Previous expenditures associated with a market test to determine the feasibility of the project,provided those costs have been expensed for tax purposes.
B) The value of a building owned by the firm that will be used for this project.
C) A decline in the sales of an existing product,provided that decline is directly attributable to this project.
D) The salvage value of assets used for the project that will be recovered at the end of the project's life.
E) Changes in net working capital attributable to the project.
G) B) and C)
Correct Answer
verified
Correct Answer
verified
B) False
Correct Answer
verified
Correct Answer
verified
B) False
Correct Answer
verified
Correct Answer
verified
A) Shipping and installation costs.
B) Cannibalization effects.
C) Opportunity costs.
D) Sunk costs that have been expensed for tax purposes.
E) Changes in net working capital.
G) A) and E)
Correct Answer
verified
Correct Answer
verified
A) Only incremental cash flows are relevant in project analysis,the proper incremental cash flows are the reported accounting profits,and thus reported accounting income should be used as the basis for investor and managerial decisions.
B) It is unrealistic to believe that any increases in net working capital required at the start of an expansion project can be recovered at the project's completion.Working capital like inventory is almost always used up in operations.Thus,cash flows associated with working capital should be included only at the start of a project's life.
C) If equipment is expected to be sold for more than its book value at the end of a project's life,this will result in a profit.In this case,despite taxes on the profit,the end-of-project cash flow will be greater than if the asset had been sold at book value,other things held constant.
D) Changes in net working capital refer to changes in current assets and current liabilities,not to changes in long-term assets and liabilities.Therefore,changes in net working capital should not be considered in a capital budgeting analysis.
E) If an asset is sold for less than its book value at the end of a project's life,it will generate a loss for the firm,hence its terminal cash flow will be negative.
G) A) and E)
Correct Answer
verified
Correct Answer
verified
Showing 41 - 60 of 61
Related Exams