Question 1

Relevant incremental cash flows include:

Accepted Answer

A) sales captured from the firm's competitors. 
B) retained sales that would have been lost to new competing products. 
C) incremental sales brought to the firm as a whole. 
D) all of the above. 
A) sales captured from the firm's competitors. 
B) retained sales that would have been lost to new competing products. 
C) incremental sales brought to the firm as a whole. 
D) all of the above.

Question 2

To be conservative,capital budgeting analysis assumes that projects cannot add sales to existing lines of business.

Accepted Answer

A) True 
 B)False

Question 3

If SuperMart decides to offer a line of groceries at its discount retail outlet,inventories are expected to increase by $1,200,000,accounts receivable by $300,000 and accounts payable by $500,000.What is the cash outflow for working capital requirements?

Accepted Answer

A) $2,000,000 
B) $1,700,000 
C) $1,500,000 
D) $1,000,000 
A) $2,000,000 
B) $1,700,000 
C) $1,500,000 
D) $1,000,000

Question 4

Incremental cash flows from a project =

Accepted Answer

A) Firm cash flows without the project plus or minus changes in net income. 
B) Firm cash flows with the project plus firm cash flows without the project. 
C) Firm cash flows with the project minus firm cash flows without the project. 
D) Firm cash flows without the project plus or minus changes in revenue with the project. 
A) Firm cash flows without the project plus or minus changes in net income. 
B) Firm cash flows with the project plus firm cash flows without the project. 
C) Firm cash flows with the project minus firm cash flows without the project. 
D) Firm cash flows without the project plus or minus changes in revenue with the project.

Question 5

Depreciation expenses affect tax-related cash flows by:

Accepted Answer

A) increasing taxable income,thus increasing taxes. 
B) decreasing taxable income,thus reducing taxes. 
C) decreasing taxable income,but not altering cash flows since depreciation is not a cash expense. 
D) all of the above. 
A) increasing taxable income,thus increasing taxes. 
B) decreasing taxable income,thus reducing taxes. 
C) decreasing taxable income,but not altering cash flows since depreciation is not a cash expense. 
D) all of the above.

Question 6

By examining cash flows,we are correctly able to analyze the timing of the benefits.

Accepted Answer

A) True 
 B)False

Question 7

Cape Cod Cranberry Products is evaluating the introduction of a new line of juice drinks consisting of cranberry juice blended with sweeter juices such as apple or grape.In the first year the product line is introduced,sales are forecasted at $2,000,000,Cost of Goods Sold at $1,200,000,other cash expenses at $300,000,depreciation expense at $800,000.The company has many other profitable product lines.It's marginal tax rate is 35%.Compute operating cash flow for the first year.

Accepted Answer

The answer of Cape Cod Cranberry Products is evaluating the...

Question 8

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Accepted Answer

A) Overhead expenses that are directly related to a project 
B) Interest expense that is directly related to the financing of a project 
C) Sunk costs that are related to a project 
D) Principal payments that are directly related to the financing of a project 
A) Overhead expenses that are directly related to a project 
B) Interest expense that is directly related to the financing of a project 
C) Sunk costs that are related to a project 
D) Principal payments that are directly related to the financing of a project

Question 9

Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.

Accepted Answer

A) True 
 B)False

Question 10

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product.The machine will cost $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after which it will be sold for $600,000.What is the depreciable cost basis of the machine?

Accepted Answer

A) $3,025,000 
B) $2,950,000 
C) $2,575,000 
D) $2,350,000 
A) $3,025,000 
B) $2,950,000 
C) $2,575,000 
D) $2,350,000

Question 11

If depreciation expense is taken over 5 years rather than 3 years,all things equal,

Accepted Answer

A) net present value will go down. 
B) depreciation has no effect on net present value. 
C) net present value will go up. 
D) the answer depends on the company's marginal tax rate. 
A) net present value will go down. 
B) depreciation has no effect on net present value. 
C) net present value will go up. 
D) the answer depends on the company's marginal tax rate.

Question 12

In 2010,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2011,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In real dollars,expected gross profit for 2011 is:

Accepted Answer

A) $40 million. 
B) $45.32 million. 
C) $48.2 0 million. 
D) $50 million. 
A) $40 million. 
B) $45.32 million. 
C) $48.2 0 million. 
D) $50 million.

Question 13

In 2010,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2011,volume is expected to increase by 10%,Inflation will increase the cost per unit by 3%,but to attract more buyers,Sunny will reduce the price by 5%.In real dollars,expected gross profit for 2011 is:

Accepted Answer

A) $45.32 million. 
B) $40 million. 
C) $38 million. 
D) $36.52 million. 
A) $45.32 million. 
B) $40 million. 
C) $38 million. 
D) $36.52 million.

Question 14

Accounting profits represents free cash flows that are available for reinvestment.

Accepted Answer

A) True 
 B)False

Question 15

If the federal income tax rate were increased,the impact of the tax increase on acceptable investment proposals would be to (ignore the impact of the tax change on the cost of capital):

Accepted Answer

A) decrease the tax shelter from depreciation. 
B) decrease net present value but the internal rate of return would stay the same. 
C) increase net present value because the tax shelter from interest and depreciation becomes more valuable. 
D) decrease both net present value.and internal rate of return. 
A) decrease the tax shelter from depreciation. 
B) decrease net present value but the internal rate of return would stay the same. 
C) increase net present value because the tax shelter from interest and depreciation becomes more valuable. 
D) decrease both net present value.and internal rate of return.

Question 16

Regal Enterprises is considering the purchase of a new embroidering machine.It is expected to generate additional sales of $400,000 per year.The machine will cost $295,000,plus $3,000 to install it.The embroiderer will save $12,000 in labor expense each year.Regal is in the 34% income tax bracket.The machine will be depreciated on a straight-line basis over five years (it has no salvage value).The embroiderer will require annual operating expenses of $136,000.What is the annual operating cash flow that the machine will generate?

Accepted Answer

A) $316,954 
B) $124,000 
C) $202,424 
D) $165,816 
A) $316,954 
B) $124,000 
C) $202,424 
D) $165,816

Question 17

Because installment costs of a new asset are a current cash expense,they are excluded from the initial outlay.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is an example of a sunk cost?

Accepted Answer

A) Overhead costs that are associated with a project 
B) Interest expense associated with a project 
C) Market study expenses incurred in order to decide if a firm should accept a project 
D) Income taxes associated with a project 
E) Depreciation expenses associated with a project 
A) Overhead costs that are associated with a project 
B) Interest expense associated with a project 
C) Market study expenses incurred in order to decide if a firm should accept a project 
D) Income taxes associated with a project 
E) Depreciation expenses associated with a project

Question 19

Famous Danish Corp.is replacing an old cookie cutter with a new one.The cookie cutter is being sold for $25,000 and it has a net book value of $75,000.Assume that Famous Danish is in the 34% income tax bracket.How much will Famous Danish net from the sale?

Accepted Answer

A) $61,000 
B) $55,000 
C) $75,000 
D) $42,000 
A) $61,000 
B) $55,000 
C) $75,000 
D) $42,000

Question 20

Anderson-EOG Inc.is evaluating the the construction of a gas pipeline to bring natural gas from Western New York state to New York City.The controller argues that every project of the company has to absorb a portion of administrative overhead including corporate headquarters and executive salaries.The Treasurer argues that these costs are irrelevant because they are merely being shifted from part of the company to another.Who is correct?

Accepted Answer

Both are partially right and partially w

Relevant incremental cash flows include:

To be conservative,capital budgeting analysis assumes that projects cannot add sales to existing lines of business.

If SuperMart decides to offer a line of groceries at its discount retail outlet,inventories are expected to increase by $1,200,000,accounts receivable by $300,000 and accounts payable by $500,000.What is the cash outflow for working capital requirements?

Incremental cash flows from a project =

Depreciation expenses affect tax-related cash flows by:

By examining cash flows,we are correctly able to analyze the timing of the benefits.

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.

If depreciation expense is taken over 5 years rather than 3 years,all things equal,

Accounting profits represents free cash flows that are available for reinvestment.

If the federal income tax rate were increased,the impact of the tax increase on acceptable investment proposals would be to (ignore the impact of the tax change on the cost of capital):

Because installment costs of a new asset are a current cash expense,they are excluded from the initial outlay.

Which of the following is an example of a sunk cost?

Famous Danish Corp.is replacing an old cookie cutter with a new one.The cookie cutter is being sold for $25,000 and it has a net book value of $75,000.Assume that Famous Danish is in the 34% income tax bracket.How much will Famous Danish net from the sale?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 12: Analyzing Project Cash Flows

Relevant incremental cash flows include:

To be conservative,capital budgeting analysis assumes that projects cannot add sales to existing lines of business.

If SuperMart decides to offer a line of groceries at its discount retail outlet,inventories are expected to increase by $1,200,000,accounts receivable by $300,000 and accounts payable by $500,000.What is the cash outflow for working capital requirements?

Incremental cash flows from a project =

Depreciation expenses affect tax-related cash flows by:

By examining cash flows,we are correctly able to analyze the timing of the benefits.

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.

If depreciation expense is taken over 5 years rather than 3 years,all things equal,

Accounting profits represents free cash flows that are available for reinvestment.

If the federal income tax rate were increased,the impact of the tax increase on acceptable investment proposals would be to (ignore the impact of the tax change on the cost of capital):

Because installment costs of a new asset are a current cash expense,they are excluded from the initial outlay.

Which of the following is an example of a sunk cost?

Famous Danish Corp.is replacing an old cookie cutter with a new one.The cookie cutter is being sold for $25,000 and it has a net book value of $75,000.Assume that Famous Danish is in the 34% income tax bracket.How much will Famous Danish net from the sale?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters