BEC - 3

Question 1

There are three general stages in which cash flows are categorized:

Answer 1

1. Inception of the Project
2. Operations
3. Disposal of the Project

Question 2

Working capital is defined as:

Answer 2

current assets minus current liabilities.

Question 3

If a new asset acquisition requires the sale of old assets, the cash received from the sale of the old asset

Answer 3

reduces the new investment’s value.

Question 4

The amount of income tax paid on a gain on a sale is treated as

Answer 4

a reduction of the sales price (which increases the initial expenditure).

Question 5

A reduction in tax resulting from a loss on a sale is treated as

Answer 5

a reduction of the new investment.

Question 6

Cash flow effects can be

Answer 6

direct or indirect.

Question 7

When a company pays out cash, receives cash, or makes a cash commitment that is directly related to the capital investment, that effect is termed

Answer 7

the direct effect.

Question 8

Transactions either indirectly associated with a capital project OR that represent non-cash activity that produces cash benefits OR obligations are termed

Answer 8

indirect cash flow effects.

Question 9

Multiply net cash inflows by (1 - Tax rate) and add the tax shield associated with noncash expenses. The sum will equal:

Answer 9

the after-tax cash flows.

Cash inflows
Less: Depreciation
= Pre-tax income
Less: Pre-tax x tax rate = taxes
= Net Income

Cash inflows
Less: Taxes
After-tax cash flows

Question 10

Must know how to:

Answer 10

1. Determine total cash outflows
2. Compute after-tax cash inflows,
3. Compute the impact of salvage value in the final year.

Question 11

Discounted cash flow valuation method includes

Answer 11

net present value and the internal rate of return methods.

Question 12

Discounted cash flows methods use

Answer 12

time value of money to measure present value of cash inflows and outflows expected from a project.

Question 13

Discounted cash flow focuses management attention on

Answer 13

relevant cash flows.

Question 14

Discounted cash flow include the

Answer 14

dollar amount of the initial investment, the dollar amount of future cash inflows and outflows, and the rate of return desired for the project.

Question 15

Setting a desired rate of return uses several approached:

Answer 15

1. Weighted-average cost of capital (WACC) method,
2. Target for new projects to meet,
3. Discount rate related to risk specific to the proposed project.

Question 16

Discounted cash flow’s limitation is when the use

Answer 16

of a simple constant growth (single interest rate) assumption. Often unrealistic.