Exam
Name
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
1) Accounting profits are used to make capital
... [Show More] budgeting decisions because generally accepted 1)
accounting principles ensure that profits are the best measure of a company's economic activity.
Answer: True False
2) Capital budgeting decisions are based on free cash flow because free cash flow better reflects when 2)
money is received and available for reinvestment than account profits.
Answer: True False
3) The guiding rule in deciding if a free cash flow is incremental is to look at the company with, 3)
versus without, the new project.
Answer: True False
4) A grocery store decides to offer beer for sale and this decision results in more potato chip sales. This 4)
is an example of a synergistic effect.
Answer: True False
5) Additional investment in working capital, even if it may be recovered at the end of a project, must 5)
be included in capital budgeting analysis because of the time value of money.
Answer: True False
6) Sunk costs are cash outflows that will occur regardless of the current accept/reject decision, and 6)
therefore should be excluded from the analysis.
Answer: True False
7) Overhead costs are sometimes incremental cash flows and other times are considered sunk costs. 7)
Answer: True False
8) Interest payments on a loan obtained specifically to fund a new project should be considered an 8)
incremental cash flow for the new project when determining the accept/reject decision.
Answer: True False
9) To be included in a capital budgeting analysis, all incremental free cash flows must be expensed on 9)
the company's books, otherwise generally accepted accounting principles will be violated.
Answer: True False
10) In measuring cash flows we are interested only in the incremental or incremental after- tax cash flows that are attributed to the investment proposal being evaluated.
Answer: True False
10)
11) The initial outlay for a new project is an example of an opportunity cost. 11)
Answer: True False
12) Synergistic benefits from an investment project include cannibalism. 12) Answer: True False
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13) A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.
Answer: True False
13)
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
14) The calculation of incremental free cash flows over a project's life should include 14)
A) labor and material saving. B) additional revenue.
C) interest to bondholders. D) A and B. Answer: D
15) Eastlick Dairy invests in a new kind of frozen dessert called polar cream that becomes very popular. So many new customers come to the store that the sales of existing ice cream products are increased. The extra sales revenue
A) should not be counted as incremental revenue for the polar cream project because the sales come from existing products.
B) are cannibalized sales that should be excluded from the analysis.
C) are synergistic effects that should be counted as incremental revenues for the polar cream project.
D) should be included in the analysis, but not the cost of the ice cream that is sold as that is a recurring expense.
Answer: C
15)
16) Sunk costs are: 16)
A) not deductible for tax purposes. B) not relevant in capital budgeting.
C) recoverable. D) incremental.
Answer: B
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
17) In general, a project's free cash flows will fall in one of the following three categories: initial outlay, differential cash flows over the project's life, and the terminal cash flow.
Answer: True False
17)
18) If an old asset is sold for less than its book value the resulting loss will save the company taxes, hence lowering the cost of the project.
Answer: True False
18)
19) If an old asset is sold for its depreciated, or book, value, then no taxes result and there is no tax effect from the sale.
Answer: True False
19)
20) One example of a terminal cash flow is the recapture of the net working capital associated with the project.
Answer: True False
20)
21) The initial outlay of a project may be reduced by the after- tax salvage value of replaced equipment. 21) Answer: True False
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22) A weakness in the capital budgeting process is the funds for an investment proposal obtained by issuing bonds, and the respective interest payments, are not considered in the capital budgeting process.
Answer: True False
22)
23) The initial outlay includes the immediate cash outflow necessary to purchase the asset and put it in operating order.
Answer: True False [Show Less]