CH11 TB CAPITAL BUDGETING CASH FLOWS Flashcards
Accounting figures and cash flows are not necessarily the same due to the presence of certain non-cash expenditures on a firm’s income statement.
T/F
TRUE
Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.
T/F
TRUE
The relevant cash flows for a proposed capital expenditure are the incremental after-tax cash outflows and resulting subsequent inflows.
T/F
TRUE
Incremental cash flows represent the additional cash flows expected as a direct result of the proposed project.
T/F
TRUE
The three major cash flow components include the initial investment, operating cash flows, and terminal cash flow.
T/F
TRUE
The three major cash flow components include the initial investment, nonoperating cash flows, and terminal cash flow.
T/F
FALSE
OCF
Initial cash outflows and subsequent operating cash inflows for a project are referred to as ________.
A) necessary cash flows
B) relevant cash flows
C) perpetual cash flows
D) ordinary cash flows
B
Relevant cash flows for a project are best described as ________.
A) incidental cash flows
B) incremental cash flows
C) sunk cash flows
D) contingent cash flows
B
Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision.
T/F
TRUE
Opportunity costs should be included as cash outflows when determining a project’s incremental cash flows.
T/F
TRUE
A sunk cost is a cash flow that could be realized from the best alternative use of an owned asset.
T/F
FALSE
Opportunity cost
An opportunity cost is a cash flow that could be realized from the best alternative use of an owned asset.
T/F
TRUE
A sunk cost is a cash outlay that has already been made and cannot be recovered.
T/F
TRUE
Companies involved in international capital budgeting projects can minimize the long-term currency risk by financing the foreign investment at least partly in the local capital markets.
T/F
TRUE
Companies involved in international capital budgeting projects can minimize political risks by structuring the investment as a joint venture and selecting a well-connected local partner.
T/F
TRUE
When making replacement decisions, the development of relevant cash flows is complicated when
compared to expansion decisions, due to the need to calculate ________ cash inflows.
A) conventional
B) opportunity
C) incremental
D) sunk
C
In developing the cash flows for an expansion project, the analysis is the same as the analysis for replacement projects where ________.
A) all cash flows from the old assets are equal
B) prior cash flows are irrelevant
C) all cash flows from the old asset are zero
D) cash inflows equal cash outflows
C
Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called ________.
A) incremental historical costs
B) incremental past expenses
C) opportunity costs foregone
D) sunk costs
D
Cash flows that could be realized from the best alternative use of an owned asset are called ________.
A) incremental costs
B) lost resale opportunities
C) opportunity costs
D) sunk costs
C
If a new asset is being considered as a replacement for an old asset, the relevant cash flows would be found by adding the operating cash flows from the old asset to the operating cash flows from the new asset.
T/F
FALSE
Compute incremental cash flows by deducting operating cash flows from the old asset to operating cash flows from the new asset
To calculate the initial investment, we subtract all cash inflows occurring at time zero from all cash outflows occurring at time zero.
T/F
TRUE
The basic cash flows that must be considered when determining the initial investment associated with a capital expenditure are the installed cost of the new asset, the after-tax proceeds (if any) from the sale of an old asset, and the change (if any) in net working capital.
T/F
TRUE
Under MACRS depreciation, the depreciable value of an asset is equal to the asset’s purchase price minus any installation costs.
T/F
FALSE
purchase price plus any installation costs
The change in net working capital—regardless of whether an increase or decrease—is not taxable because it merely involves a net buildup or net reduction of current accounts.
T/F
TRUE
If an investment in a new asset results in a change in current assets that exceeds the change in current liabilities, this change in net working capital represents an initial cash outflow.
T/F
TRUE
Net working capital is the difference between a firm’s total assets and its total liabilities.
T/F
FALSE
current
Which of the following would be used in the computation of an initial investment?
A) the annual after-tax inflow expected from the investment
B) the initial purchase price of the investment
C) the historic cost of the existing investment
D) the profits from the new investment
B
Which of the following basic variables must be considered in determining the initial investment associated with a capital expenditure?
A) incremental annual savings produced by the new asset
B) cash flows generated by the new investment
C) proceeds from the sale of an existing asset
D) profits on the sale of an existing asset
C
An important cash inflow in the analysis of initial cash flows for a replacement project is ________.
A) taxes
B) the cost of the new asset
C) installation cost
D) the sale value of the old asset
D
When evaluating a capital budgeting project, installation costs of a new machine must be considered as part of ________.
A) the operating cash inflows
B) the initial investment
C) the incremental operating cash inflows
D) the operating cash outflows
B
The change in net working capital when evaluating a capital budgeting decision is ________.
A) the change in fixed liabilities minus the change in fixed assets
B) the increase in current assets
C) the increase in current liabilities
D) the change in current assets minus the change in current liabilities
D
In evaluating the initial investment for a capital budgeting project, ________.
A) an increase in net working capital is considered a cash inflow
B) a decrease in net working capital is considered a cash outflow
C) an increase in net working capital is considered a cash outflow
D) net working capital does not have to be considered
C
A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000,
accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is ________.
A) an increase of $120,000
B) a decrease of $60,000
C) a decrease of $120,000
D) an increase of $60,000
D
A corporation is considering expanding operations to meet growing demand. With the capital expansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital is ________.
A) an increase of $10,000
B) a decrease of $10,000
C) a decrease of $90,000
D) an increase of $80,000
B
If accounts receivable increase by $1,000,000, inventory decreases by $500,000, and accounts payable increase by $500,000, net working capital would ________.
A) decrease by $500,000
B) increase by $1,500,000
C) increase by $2,000,000
D) experience no change
D
Suppose the tax law changes to allow firms to immediately and fully deduct the cost of investments they make rather than depreciating them under the MACRS system. If all else remains the same, this change would tend to increase the NPV of an investment project.
T/F
TRUE
All other factors held constant, the higher the tax rate that firms must pay, the more valuable are depreciation deductions.
T/F
TRUE
All other factors held constant, the longer the firm must take to depreciate the initial cost of an investment project, the higher will be the project’s NPV.
T/F
FALSE
In terms of an investment project’s operating cash flows, depreciation deductions are irrelevant because they do not represent an outlay of cash.
T/F
FALSE
The book value of an asset is equal to its installed cost of asset minus the accumulated depreciation.
T/F
TRUE
In case of an existing asset which is depreciable and is used in business and is sold for a price equal to its initial purchase price, the difference between the sales price and its book value is considered as recaptured depreciation and will be taxed as ordinary income.
T/F
TRUE
Recaptured depreciation is the portion of the sale price that is below the book value.
T/F
FALSE
above
Capital gain is the portion of the sale price that is in excess of the initial purchase price.
T/F
TRUE
Recaptured depreciation is the portion of the sale price that is in excess of the initial purchase price.
T/F
FALSE
book value
If an asset is depreciable and used in business, any loss on the sale of the asset is tax-deductible only against other capital gains income, not against ordinary income.
T/F
FALSE
This applies to non-depreciable assets
If an asset is sold for more than its initial purchase price, the gain on the sale is composed of two parts: a capital gain and recaptured depreciation.
T/F
TRUE
If an asset is sold for book value, the gain on the sale is composed of two parts: a capital gain and accumulated depreciation.
T/F
FALSE
Recaptured depreciation
If an asset is sold for less than its book value, the loss on the sale may be used to offset ordinary operating income provided the asset is used in the business.
T/F
TRUE
The book value of an asset is equal to the ________.
A) fair market value minus the accounting value
B) original purchase price plus annual depreciation expense
C) original purchase price minus accumulated depreciation
D) depreciated value plus recaptured depreciation
C
The tax treatment regarding the sale of existing assets that are sold for more than the original
purchase price results in ________.
A) an ordinary tax benefit
B) no tax benefit or liability
C) a recaptured depreciation taxed as ordinary income
D) a capital gain tax liability
D
The tax treatment regarding the sale of existing assets that are sold for more than the book value but less than the original purchase price results in a(n) ________.
A) ordinary tax benefit
B) capital gain tax liability
C) recaptured depreciation taxed as ordinary income
D) capital gain tax liability and recaptured depreciation taxed as ordinary income
C
The tax treatment regarding the sale of existing assets that are sold for their book value results in ________.
A) an ordinary tax benefit
B) no tax benefit or liability
C) recaptured depreciation taxed as ordinary income
D) a capital gain tax liability and recaptured depreciation taxed as ordinary income
B
The portion of an asset’s sale price that is above its book value and below its initial purchase price is called ________.
A) a capital gain
B) recaptured depreciation
C) a capital loss
D) book value
B
The portion of an asset’s sale price that is below its book value and below its initial purchase price is called ________.
A) a capital gain
B) recaptured depreciation
C) a capital loss
D) book value
C
The tax treatment regarding the sale of existing assets that are sold for less than the book value results in ________.
A) an ordinary tax benefit
B) a capital loss tax benefit
C) recaptured depreciation taxed as ordinary income
D) a capital gain tax liability and recaptured depreciation taxed as ordinary income
B
A loss on the sale of an asset that is depreciable and used in business is ________; a loss on the sale of a non-depreciable asset is ________.
A) deductible from capital gains income; deductible from ordinary income
B) deductible from ordinary income; deductible only against capital gains
C) a credit against the tax liability; not deductible
D) not deductible; deductible only against capital gains
B
Which of the following must be considered in computing the terminal value of a replacement project?
A) operating cash flow for the final year
B) after-tax proceeds from the sale of a new asset
C) before-tax proceeds from the sale of an old asset
D) before-tax proceeds from the sale of a new asset
B
All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted as an expense on a firm’s income statement back to net profits after taxes.
T/F
TRUE
In computing after-tax operating cash flows, both operating costs and financing costs must be deducted from any cash inflows received.
T/F
FALSE
Financing costs are not considered
In computing after-tax operating cash flows, only operating costs but not financing costs must be deducted from any cash inflows received.
T/F
TRUE
In evaluating a proposed project, incremental operating cash inflows are relevant cash flows.
T/F
TRUE
Benefits expected from proposed capital expenditures ________.
A) must be on a pre-tax basis because it provides the true position of profits by the firm
B) must be on an after-tax basis because no benefits may be used until tax claims are satisfied
C) may be valued either on pre-tax or after-tax basis based on the size of the firm
D) are independent of interest and taxes
B
One basic technique used to evaluate after-tax operating cash flows is to ________.
A) add noncash charges to net income
B) subtract depreciation from operating revenues
C) add cash expenses to net income
D) subtract cash expenses from noncash charges
A
