CHAPTER 10
Making Capital Investment Decisions
I. DEFINITIONS
INCREMENTAL CASH FLOWS
a 1. The changes in a firm’s future cash flows that are a direct consequence of accepting a
project are called _____ cash flows.
a. incremental b. stand-alone c. after-tax d. net present value e. erosion
STAND-ALONE PRINCIPLE
b 2. The evaluation of a project based solely on its incremental cash flows is the basis of
the:
a. incremental cash flow method. b. stand-alone principle. c. dividend growth model. d. after-tax salvage value analysis. e. discounted payback method.
SUNK COSTS
c 3. A cost that has already been paid, or the liability to pay has already been incurred, is
a(n):
a. salvage value expense. b. net working capital expense. c. sunk cost. d. opportunity cost. e. erosion cost.
OPPORTUNITY COSTS
d 4. The most valuable investment given up if an alternative investment is chosen is a(n): a. salvage value expense. b. net working capital expense. c. sunk cost. d. opportunity cost. e. erosion cost.
EROSION COSTS
e 5. The cash flows of a new project that come at the expense of a firm’s existing projects
are called:
a. salvage value expenses. b. net working capital expenses. c. sunk costs. d. opportunity costs. e. erosion costs.
PRO FORMA FINANCIAL STATEMENTS
a 6. A pro forma financial statement is one that: a. projects future years’ operations. b. is expressed as a percentage of the total assets of the firm. c. is expressed as a percentage of the total sales of the firm. d. is expressed relative to a chosen base year’s financial statement. e. reflects the past and current operations of the firm.
MACRS DEPRECIATION
b 7. The depreciation method currently allowed under US tax law governing the
accelerated write-off of property under various lifetime classifications is called _____ depreciation.
a. FIFO b. MACRS c. straight-line d. sum-of-years digits e. curvilinear
DEPRECIATION TAX SHIELD
c 8. The cash flow tax savings generated as a result of a firm’s tax-deductible depreciation
expense is called the:
a. after-tax depreciation savings. b. depreciable basis. c. depreciation tax shield. d. operating cash flow. e. after-tax salvage value.
CASH FLOW FROM PROJECTS
d 9. The cash flow from projects for a company is computed as the: a. net operating cash flow generated by the project, less any sunk costs and erosion costs. b. sum of the incremental operating cash flow and after-tax salvage value of the project. c. net income generated by the project, plus the annual depreciation expense. d. sum of the incremental operating cash flow, capital spending, and net working capital
expenses incurred by the project.
e. sum of the sunk costs, opportunity costs, and erosion costs of the project.
EQUIVALENT ANNUAL COST
e 10. The annual annuity stream of payments with the same present value as a project’s costs
is called the project’s _____ cost.
a. incremental b. sunk c. opportunity d. erosion e. equivalent annual
II. CONCEPTS
INCREMENTAL CASH FLOW
b 11. One purpose of identifying all of the incremental cash flows related to a proposed project is to: a. isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm. b. eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project. c. make each project appear as profitable as possible for the firm. d. include both the proposed and the current operations of a firm in the analysis of the project. e. identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.
INCREMENTAL CASH FLOW
e 12. Which of the following are examples of an incremental cash flow? I. an increase in accounts receivable II. a decrease in net working capital III. an increase in taxes IV. a decrease in the cost of goods sold a. I and III only b. III and IV only c. I and IV only d. I, III, and IV only e. I, II, III, and IV
INCREMENTAL CASH FLOW
c 13. Which one of the following is an example of an incremental cash flow? a. the annual salary of the company president which is a contractual obligation b. the rent on a warehouse which is currently being utilized c. the rent on some new machinery that is required for an upcoming project d. the property taxes on the currently owned warehouse which has been sitting idle but is going to be utilized for a new project e. the insurance on a company-owned building which will be utilized for a new project
STAND-ALONE PRINCIPLE
d 14. The stand-alone principle advocates project analysis which is focused on _____ costs. a. sunk b. total c. variable d. incremental e. fixed
SUNK COST
c 15. Sunk costs include any cost that: a. will change if a project is undertaken. b. will be incurred if a project is accepted. c. has previously been incurred and cannot be changed. d. is paid to a third party and cannot be refunded for any reason whatsoever. e. will occur if a project is accepted and once incurred, cannot be recouped.
SUNK COST
d 16. You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost. a. opportunity b. fixed c. incremental d. sunk e. relevant
EROSION
b 17. Erosion can be explained as the: a. additional income generated from the sales of a newly added product. b. loss of current sales due to a new project being implemented. c. loss of revenue due to employee theft. d. loss of revenue due to customer theft. e. loss of cash due to the expenses required to fix a parking lot after a heavy rain storm.
EROSION
a 18. Which of the following are examples of erosion? I. the loss of sales due to increased competition in the product market II. the loss of sales because your chief competitor just opened a store across the street from your store III. the loss of sales due to a new product which you recently introduced IV. the loss of sales due to a new product recently introduced by your competitor a. III only b. III and IV only c. I, III and IV only d. II and IV only e. I, II, III, and IV
TYPES OF COSTS
d 19. Which of the following should be included in the analysis of a project? I. sunk costs II. opportunity costs III. erosion costs IV. incremental costs a. I and II only b. III and IV only c. II and IV only d. II, III, and IV only e. I, II, and IV only
NET WORKING CAPITAL
d 20. All of the following are anticipated effects of a proposed project. Which of these should be included in the initial project cash flow related to net working capital? I. an inventory decrease of $5,000 II. an increase in accounts receivable of $1,500 III. an increase in fixed assets of $7,600 IV. a decrease in accounts payable of $2,100 a. I and II only b. I and III only c. II and IV only d. I, II, and IV only e. I, II, III, and IV
NET WORKING CAPITAL
a 21. Changes in the net working capital: a. can affect the cash flows of a project every year of the project’s life. b. only affect the initial cash flows of a project. c. are included in project analysis only if they represent cash outflows. d. are generally excluded from project analysis due to their irrelevance to the total project. e. affect the initial and the final cash flows of a project but not the cash flows of the middle years.
NET WORKING CAPITAL
c 22. Which one of the following will decrease net working capital of a firm? a. a decrease in accounts payable b. an increase in inventory c. a decrease in accounts receivable d. an increase in the firm’s checking account balance e. a decrease in fixed assets
公司理财 题库 Chap010
