Financial Management Quiz

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

• incremental cash flows.

• internal cash flows.

• external cash flows.

• erosion effects.

• financing cash flows.

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

• underlying value principle

• stand-alone principle

• equivalent cost principle

• salvage principle

• fundamental principle

Which one of the following costs was incurred in the past and cannot be recouped?

• incremental

• side

• sunk

• opportunity

• erosion

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

• salvage value

• wasted value

• sunk cost

• opportunity cost

• erosion

Which one of the following best describes the concept of erosion?

• expenses that have already been incurred and cannot be recovered

• change in net working capital related to implementing a new project

• the cash flows of a new project that come at the expense of a firm's existing cash flows

• the alternative that is forfeited when a fixed asset is utilized by a project

• the differences in a firm's cash flows with and without a particular project

Which one of the following best describes pro forma financial statements?

• financial statements expressed in a foreign currency

• financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales

• financial statements showing projected values for future time periods

• financial statements expressed in real dollars, given a stated base year

• financial statements where all accounts are expressed as a percentage of last year's values

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?

• IRR

• ACRS

• AA

• straight-line to zero

• straight-line with salvage

The depreciation tax shield is best defined as the:

• amount of tax that is saved when an asset is purchased.

• tax that is avoided when an asset is sold as salvage.

• amount of tax that is due when an asset is sold.

• amount of tax that is saved because of the depreciation expense.

• amount by which the aftertax depreciation expense lowers net income.

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

• yearly incremental costs

• sunk costs

• opportunity costs

• erosion cost

• equivalent annual cost

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

• storing supplies in the same space currently used for materials storage

• utilizing the basket manager to oversee wreath production

• hiring additional employees to handle the increased workload should the firm accept the wreath project

• researching the market to determine if wreath sales might be profitable before deciding to proceed

• planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt