63) The cash flow from a project is computed as the:

63) The cash flow from a project is computed as the: A) sum of the sunk costs, opportunity costs, and erosion costs of the project. B) net income generated by the project, plus the annual depreciation expense. C) net operating cash flow generated by the project, less any sunk costs and erosion

costs. D) sum of the incremental operating cash flow, capital spending, and net working

capital cash flows incurred by the project. E) sum of the incremental operating cash flow and aftertax salvage value of the

project.

63)

64) Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.

A) coupon B) effective C) stripped D) real E) nominal

64)

65) Sunk costs include any cost that: A) will be incurred if a project is accepted. B) will change if a project is undertaken. C) will occur if a project is accepted and once incurred, cannot be recouped. D) has previously been incurred and cannot be changed. E) will be paid to a third party and cannot be refunded for any reason whatsoever.

65)

14

66) 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) fixed B) opportunity C) incremental D) sunk E) relevant

66)

67) Erosion can be explained as the: A) additional income generated from the sales of a newly added product. B) loss of revenue due to customer theft. C) loss of revenue due to employee theft. D) loss of current sales due to a new project being implemented. E) loss of cash due to the expenses required to fix a parking lot after a heavy rain

storm.

67)

68) Which one of the following should be excluded from the analysis of a project? A) sunk costs B) incremental fixed costs C) incremental variable costs D) erosion costs E) opportunity costs

68)

69) All of the following are anticipated effects of a proposed project. Which of these should be considered when computing the cash flow for the final year of a project?

A) operating cash flow and salvage values B) salvage values and net working capital recovery C) net working capital recovery and operating cash flow D) operating cash flow, net working capital recovery, salvage values E) operating cash flow only

69)

70) Changes in the net working capital: A) only affect the initial cash flows of a project. B) affect the initial and the final cash flows of a project but not the cash flows of the

middle years. C) can affect the cash flows of a project every year of the project’s life. D) are included in project analysis only if they represent cash outflows. E) are generally excluded from project analysis due to their irrelevance to the total

project.

70)

15

71) The net working capital of a firm will decrease if there is: A) a decrease in accounts receivable. B) a decrease in fixed assets. C) a decrease in accounts payable. D) an increase in inventory. E) an increase in the firm’s checking account balance.

71)

72) Net working capital: A) is the only expenditure where at least a partial recovery can be made at the end of

a project. B) can be ignored in project analysis because any expenditure is normally recouped

by the end of the project. C) is frequently affected by the additional sales generated by a new project. D) requirements generally, but not always, create a cash inflow at the beginning of a

project. E) expenditures commonly occur at the end of a project.

72)

73) The book value of an asset is primarily used to compute the: A) amount of cash received from the sale of an asset. B) amount of tax due on the sale of an asset. C) change in depreciation needed to reflect the market value of the asset. D) amount of tax saved annually due to the depreciation expense. E) annual depreciation tax shield.

73)

74) The salvage value of an asset creates an aftertax cash flow in an amount equal to the: A) sales price of the asset. B) sales price plus the tax due based on the sales price minus the book value. C) sales price minus the book value. D) sales price plus the tax due based on the book value minus the sales price. E) sales price minus the tax due based on the sales price minus the book value.

74)

75) A project’s operating cash flow will increase when the: A) interest expense is lowered. B) sales projections are lowered. C) net working capital requirement increases. D) depreciation expense increases. E) earnings before interest and taxes decreases.

75)

16

76) Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as:

A) Net income + Depreciation. B) (Sales – Costs) × (1 – Tax rate). C) EBIT – Depreciation + Taxes. D) EBIT – Taxes. E) EBIT × (1 – Tax rate) + Depreciation × Tax rate.

76)

77) Tax shield refers to a reduction in taxes created by: A) a reduction in sales. B) a project’s incremental expenses. C) opportunity costs. D) an increase in interest expense. E) noncash expenses.

77)

78) Marshall’s purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project?

A) $1,208,635 B) $1,498,000 C) $1,100,000 D) $1,661,500 E) $1,710,000

78)

79) The Boat Works currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500. The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it. The equipment originally cost $387,500 five years ago, has a current book value of $132,700, and a current market value of $139,000. Other capital purchases costing $520,000 will also be required. What is the value of the opportunity costs that should be included in the initial cash flow for the expansion project?

A) $348,500 B) $485,000 C) $537,200 D) $329,700 E) $425,000

79)

17

80) Foamsoft sells customized boat shoes. Currently, it sells 16,850 pairs of shoes annually at an average price of $79 a pair. It is considering adding a lower-priced line of shoes which sell for $49 a pair. Foamsoft estimates it can sell 5,000 pairs of the lower-priced shoes but will sell 1,250 less pairs of the higher-priced shoes by doing so. What is the estimated value of the erosion cost that should be charged to the lower-priced shoe project?

A) $52,000 B) $98,750 C) $138,750 D) $123,240 E) $146,250

80)

81) Sue purchased a house for $89,000, spent $56,000 upgrading it, and currently had it appraised at $212,900. The house is being rented to a family for $1,200 a month, the maintenance expenses average $200 a month, and the property taxes are $4,800 a year. If she sells the house she will incur $20,000 in expenses. She is considering converting the house into professional office space. What opportunity cost, if any, should she assign to this property if she has been renting it for the past two years?

A) $192,900 B) $185,000 C) $178,500 D) $120,000 E) $232,900

81)

82) Ernie’s Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10-year life of the project. The applicable tax rate is 34 percent. What is the operating cash flow for this project?

A) $15,000 B) $17,900 C) $18,300 D) $19,200 E) $21,300

82)

83) Kurt’s Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is the operating cash flow for this project?

A) $33,000 B) $27,000 C) $13,000 D) $7,000 E) $40,000

83)