Chaptert 10

Which of the following would not be considered a relevant cash flow when evaluating a new project?

• Cost savings from using new equipment

• Depreciation of an existing asset already in use

• Additional revenue from the project

• Initial investment in working capital

If a project's IRR is greater than the required return, what can you say about the NPV?

• NPV is negative

• NPV is zero

• NPV is positive

• It depends on the payback period

What is the correct formula for Operating Cash Flow using the bottom-up approach?

• EBIT + Depreciation – Taxes

• Net Income + Depreciation

• Sales – Costs – Taxes

• (Sales – Costs)(1 – Tax) + Dep × Tax

A firm invests $100,000 in a project that saves $30,000 per year. Depreciation is $20,000/year, tax rate is 25%. What is annual OCF using the tax shield approach?

• $22,500

• $30,000

• $27,500

• $35,000

Which of the following best describes the “stand-alone principle”?

• Evaluate a project based on firm-wide earnings

• Consider only net income when evaluating projects

• Evaluate the project’s own cash flows as a mini-firm

• Include sunk costs in the analysis

In an NPV calculation, how is salvage value handled?

• Ignored

• Subtracted in Year 0

• Discounted and added to final year cash flow

• Treated as depreciation

If a project requires a $20,000 investment in working capital and it’s recovered at the end, how should this appear in your cash flow table?

• Subtracted every year

• Added at the start, subtracted later

• Subtracted at the start, added back at the end

• Ignored entirely

A project with a 3-year life has OCF of $20,000, capital spending of $50,000, and NWC investment of $10,000. What is the total Year 0 cash outflow?

• $20,000

• $50,000

• $60,000

• $70,000

Which method spreads a project’s cost into a constant annual value to compare projects with different lifespans?

• IRR

• Payback Period

• Equivalent Annual Cost

• Profitability Index

When would you prefer the EAC method over NPV?

• When projects have the same life span

• When comparing financing methods

• When projects have different lives but repeat indefinitely

• When calculating net income