09 Finance Update

Incremental cash flows from a project =

• Firm cash flows without the project plus or minus changes in net income.
• Firm cash flows with the project plus firm cash flows without the project.
• Firm cash flows with the project minus firm cash flows without the project.
• Firm cash flows without the project plus or minus changes in revenue with the project.

Which of the following is NOT one of the categories for a project's relevant after-tax cash flows?

• Financing flows
• Initial cash outflow
• Differential flows over the project's life
• Terminal cash flow\

Which of the following is NOT part of a project's initial cash outflow?

• The asset's purchase price
• Funds committed to support increased inventory levels due to expected increased sales if the firm adopts the project
• A marketing survey completed last year to determine the project's feasibility
• Expenses incurred to install the asset

Which of the following is NOT considered in the calculation of incremental cash flows?

• Depreciation tax shield
• Sunk costs
• Opportunity costs
• retained sales that would have been lost to new competing products.

How is interest expense that is associated with a project treated in the capital budgeting process?

• It is treated as a cash outflow when estimating the incremental cash flows associated with a project.
• It is built into the discount rate.
• It is considered a synergistic incremental cash flow.
• Interest expense is not relevant to any capital budgeting decisions.

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

• Overhead costs that are associated with a project
• Interest expense associated with a project
• Market study expenses incurred in order to decide if a firm should accept a project
• Depreciation expenses associated with a project

Which of the following cash flows should not be included as incremental costs or revenues when evaluating capital projects?

• A new security system will reduce shoplifting losses by $50,000 per year.
• Thirty percent of the sales of a new product will result from customers switching from the previous version of the product.
• Interest on construction loans will increase interest expense by $225,000 per year.
• The project will occupy space which is currently being rented to another business for $3,000 per month.

Which of the following expenses should be included when estimating cash flows for investment projects?

• Interest expense related to financing a project
• Sunk costs
• Required principal payments related to financing a project
• Opportunity costs

J&P Accounting purchased new tax software two years ago. The software is still useable, but faster, more comprehensive software is available. If J&P purchases the new software, the cost of the old software is

• a sunk cost.
• an opportunity cost.
• a terminal expense.
• an overhead expense.

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

• net present value will go down.
• depreciation has no effect on net present value.
• net present value will go up.
• the answer depends on the company's marginal tax rate.