Final Exam - Chapter 8

Question 1

Capital Budgeting Analysis

• Essentially we try to figure out?

Answer 1

Project costs & Project return.

Question 2

Capital Budgeting Analysis

How Project costs & Project return.?

Answer 2

By estimating cash flows

from the project.

Question 3

Principles of Estimating Cash Flows

What are the 2 Cash Flows

Answer 3

Initial Cash Outflow

Net Operating Cash Flows

Question 4

Principles of Estimating Cash Flows
Cash Flows
Initial Cash Outflow

Answer 4

Net Investment

Project cost

Question 5

Principles of Estimating Cash Flows

Net Operating Cash Flows

Answer 5

Project returns

Question 6

Cash flows should be measured on?

Answer 6

on an incremental

basis

Question 7

Cash flows should be measured on

Answer 7

an after-tax basis

Question 8

 All the _______ ______ of a project should be included in the cash flow calculations

Answer 8

indirect effects

Question 9

 ____ _____ should not be considered

Answer 9

Sunk costs

Question 10

 ______ ________ should be considered

Answer 10

Opportunity costs

Question 11

Opportunity costs

Answer 11

use of the land owned/any assets held

Question 12

Net Investment =?

Formula

Answer 12

new project cost ((inc. installation and shipping costs)

+
investment in net working capital initially.

• net proceeds from the sale of existing assets
  (when make a replacement decision)

+
Taxes associated with the sale of the existing assets and/or the purchase of the new assets

Question 13

Net (Operating) Cash Flows

Formula

Answer 13

Delta Revenue - Delta Cost - Delta Depreciation] x (1-T) + Delta Depreciation - Delta NWC
= Operating Cash Flow

Question 14

Case 1

Sale = book value

Answer 14

No tax consequences

Question 15

Case 2

Sale < book value

Answer 15

Tax savings =
Marginal tax rate x
Amount of loss

Question 16

Case 3 Original cost >

Sale > book value

Answer 16

Tax liability =
Gain x
Marginal tax rate

Question 17

Case 4

Sale > original cost

Answer 17

Tax liability =
(Gain +
Capital gain) x
Marginal tax rate

Question 18

Recovery of Net Working Capital

Answer 18

The total amount of accumulated net working capital is usually recovered at the end of the life of the project

Question 19

The recovery of net working capital would result in increase in what?

Answer 19

net cash flow

Question 20

 There are generally

Answer 20

no tax considerations associated with the

recovery of net working capital

Question 21

Should you deduct the interest charges associated with a particular project?

Answer 21

No

Question 22

It is generally considered incorrect to deduct the interest charges associated with a particular project for two reasons:

Answer 22

1. Profitability of the project should be
   independent of financing
   2.The cost of capital (discount rate) already
   incorporates the cost of funds used to finance a project.

Question 23

Depreciation Method

Answer 23

Straight-line or various accelerated depreciation

methods can be used

Question 24

Depreciation Method

For tax purposes

Answer 24

, the Modified Accelerated

Cost Recovery System (MACRS) is used

Question 25

Straight-line depreciation methods

Formula

Answer 25

Annual deprciation amount =
Installed cost
/
Number of years over which the asset is depreciated

Question 26

(3) Problems in Cash Flow Estimation

Answer 26

It is difficult to predict the actual cash flows
of a project
Cash flow estimates for different projects
may have varying degrees of uncertainty
The returns from asset replacement
projects are generally easier to forecast
than the returns from new product
introduction projects