Question 1

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:
A)incremental cash flows.
B)internal cash flows.
C)external cash flows.
D)erosion effects.
E)financing cash flows.

Accepted Answer

The difference between the cash flows with and without the project is what the project adds to the firm's cash flows, known as incremental cash flows.

Question 2

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?
A)underlying value principle
B)stand-alone principle
C)equivalent cost principle
D)salvage principle
E)fundamental principle

Accepted Answer

The stand-alone principle assumes that a proposed project is analyzed based on its incremental cash flows, meaning that only cash flows related to the project itself are considered and not any external factors. This principle is a key part of capital budgeting decision making.

Question 3

Which one of the following will increase a bid price?
A)a decrease in the fixed costs
B)a reduction in the net working capital requirement
C)a reduction in the firm's tax rate
D)an increase in the salvage value
E)an increase in the required rate of return

Accepted Answer

E

Question 4

The depreciation tax shield is best defined as the:
A)amount of tax that is saved when an asset is purchased.
B)tax that is avoided when an asset is sold as salvage.
C)amount of tax that is due when an asset is sold.
D)amount of tax that is saved because of the depreciation expense.
E)amount by which the aftertax depreciation expense lowers net income.

Accepted Answer

The depreciation tax shield is the amount of tax that is saved because of the depreciation expense. Depreciation reduces taxable income, which in turn reduces the taxes owed, resulting in a tax shield.

Question 5

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?
A)sunk
B)total
C)variable
D)incremental
E)fixed

Accepted Answer

The stand-alone principle advocates for analyzing projects based solely on the incremental costs and benefits, which are the costs and benefits directly attributable to the project and do not include any sunk costs or externalities. Therefore, the best choice is D - Incremental costs.

Question 6

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets.The firm is currently considering making handmade wreaths as well.Which one of the following is the best example of an incremental operating cash flow related to the wreath project?
A)storing supplies in the same space currently used for materials storage
B)utilizing the basket manager to oversee wreath production
C)hiring additional employees to handle the increased workload should the firm accept the wreath project
D)researching the market to determine if wreath sales might be profitable before deciding to proceed
E)planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt

Accepted Answer

Hiring additional employees will result in an incremental operating cash flow because it is an immediate cash outflow to the firm. The other options do not involve a cash in or outflow in the near term. Storing supplies in the same space, utilizing a current employee, researching the market, and assuming lower interest expense may have an impact on future cash flows but do not involve an immediate cash flow impact.

Question 7

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?
A)providing both ketchup and mustard for its customer's use
B)repairing the roof of the hot dog stand because of water damage
C)selling fewer hot dogs because hamburgers were added to the menu
D)offering French fries but not onion rings
E)losing sales due to bad weather

Accepted Answer

The answer of Which one of the following best illustrates...

Question 8

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?
A)salvage value
B)wasted value
C)sunk cost
D)opportunity cost
E)erosion

Accepted Answer

The option that is foregone is referred to as the opportunity cost. It is the cost of the next best alternative foregone.

Question 9

G & L Plastic Molders spent $1,200 last week repairing a machine.This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project.When analyzing the proposed project, the $1,200 should be treated as which type of cost?
A)opportunity
B)fixed
C)incremental
D)erosion
E)sunk

Accepted Answer

The $1,200 cost incurred in repairing the machine is a sunk cost, meaning it has already been paid and cannot be recovered. Therefore, it should not be considered in the analysis of the proposed project.

Question 10

Which one of the following is an example of a sunk cost?
A)$1,500 of lost sales because an item was out of stock
B)$1,200 paid to repair a machine last year
C)$20,000 project that must be forfeited if another project is accepted
D)$4,500 reduction in current shoe sales if a store commences selling sandals
E)$1,800 increase in comic book sales if a store commences selling puzzles

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of future decisions. Option B is an example of a sunk cost because the $1,200 spent on repairing a machine last year is already spent and cannot be recovered. The other options involve potential future costs or benefits, and are not sunk costs.

Question 11

Which one of the following best describes the concept of erosion?
A)expenses that have already been incurred and cannot be recovered
B)change in net working capital related to implementing a new project
C)the cash flows of a new project that come at the expense of a firm's existing cash flows
D)the alternative that is forfeited when a fixed asset is utilized by a project
E)the differences in a firm's cash flows with and without a particular project

Accepted Answer

Erosion refers to the reduction in cash flows that a company experiences from its existing products or services due to the introduction of a new product or project.

Question 12

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?
A)IRR
B)ACRS
C)AAR
D)straight-line to zero
E)straight-line with salvage

Accepted Answer

ACRS (Accelerated Cost Recovery System) is the depreciation method which allows accelerated write-offs of property under various lifetime classifications. It was a method used in the United States tax code between the mid-1980s to the mid-1990s. It was designed to encourage businesses to invest in property by allowing them to write off the cost of the assets more quickly than they would be able to under other methods.

Question 13

The bid price is:
A)an aftertax price.
B)the aftertax contribution margin.
C)the highest price you should charge if you want the project.
D)the only price you can bid if the project is to be profitable.
E)the minimum price you should charge if you want to earn a target return on investment.

Accepted Answer

The bid price should be the minimum price you should charge if you want to earn a target return on investment. This ensures that the project is profitable and meets your financial objectives. Choosing option E is the correct choice.

Question 14

You are considering the purchase of a new machine.Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives.Whichever machine is purchased will be replaced at the end of its useful life.You should select the machine which has the:
A)longest life.
B)highest annual operating cost.
C)lowest annual operating cost.
D)highest equivalent annual cost.
E)lowest equivalent annual cost.

Accepted Answer

The best choice would be the machine with the lowest equivalent annual cost. Equivalent annual cost takes into consideration both the initial cost and ongoing costs over the life of the machine, and presents it as an annual payment. This allows for a fair comparison between the two machines, even if they have different lives and ongoing costs. Choosing the machine with the lowest equivalent annual cost would ensure the lowest overall cost for the business.

Question 15

Which one of the following costs was incurred in the past and cannot be recouped?
A)incremental
B)side
C)sunk
D)opportunity
E)erosion

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They are irrelevant to a decision-making process as they cannot be changed.

Question 16

Which of the following should be included in the analysis of a new product?
I.money already spent for research and development of the new product
II.reduction in sales for a current product once the new product is introduced
III.increase in accounts receivable needed to finance sales of the new product
IV.market value of a machine owned by the firm which will be used to produce the new product
A)I and III only
B)II and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

II, III, and IV are correct because they represent future cash flows or economic impacts directly related to the decision of launching the new product. I is incorrect because money already spent (sunk costs) should not influence future decisions.

Question 17

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?
A)yearly incremental costs
B)sunk costs
C)opportunity costs
D)erosion cost
E)equivalent annual cost

Accepted Answer

The question is asking about a concept known as equivalent annual cost, which is the annual annuity stream of payments that has the same present value as a project's costs. Therefore, the correct answer is E, equivalent annual cost. The other choices, yearly incremental costs, sunk costs, opportunity costs, and erosion costs, do not relate to the definition given in the question.

Question 18

Danielle's is a furniture store that is considering adding appliances to its offerings.Which of the following should be considered incremental cash flows of this project?
I.utilizing the credit offered by a supplier to purchase the appliance inventory
II.benefiting from increased furniture sales to appliance customers
III.borrowing money from a bank to fund the appliance project
IV.purchasing parts for inventory to handle any appliance repairs that might be necessary
A)I and II only
B)III and IV only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

I and IV are both related to the incremental cash flows directly associated with the appliances (purchasing inventory and handling repairs), while II is an indirect benefit that may result from selling both furniture and appliances. III, on the other hand, is not directly related to the incremental cash flows associated with the new appliance project. It may be necessary to borrow money from a bank, but the interest and principal repayments would be considered financing costs, not incremental cash flows. Therefore, the best choice is C which includes I, II, and IV.

Question 19

All of the following are related to a proposed project.Which of these should be included in the cash flow at time zero?
I.purchase of $1,400 of parts inventory needed to support the project
II.loan of $125,000 used to finance the project
III.depreciation tax shield of $1,100
IV.$6,500 of equipment needed to commence the project
A)I and II only
B)I and IV only
C)II and IV only
D)I, II, and IV only
E)I, II, III, and IV

Accepted Answer

Only the costs directly related to the project should be included in the cash flow at time zero. Out of the given options, only the purchase of parts inventory and the equipment needed to commence the project are directly related to the project itself, so choices I and IV should be included. The loan used to finance the project would not affect the cash flow at time zero, but rather the cash flow in future periods, so choice II should not be included. The depreciation tax shield is an indirect benefit of owning and using the equipment, so it should not be included in the cash flow at time zero, so choice III should not be included.

Question 20

Which one of the following best describes pro forma financial statements?
A)financial statements expressed in a foreign currency
B)financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales
C)financial statements showing projected values for future time periods
D)financial statements expressed in real dollars, given a stated base year
E)financial statements where all accounts are expressed as a percentage of last year's values

Accepted Answer

Pro forma financial statements are hypothetical or projected financial statements that show the expected financial results of future events or actions, such as mergers and acquisitions, new product launches, or changes in capital structure. They are used to estimate the potential financial impact of these events and help with financial planning and decision-making.

Quiz 10: Project Analysis and Evaluation

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Which one of the following will increase a bid price?

The depreciation tax shield is best defined as the:

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets.The firm is currently considering making handmade wreaths as well.Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

G & L Plastic Molders spent $1,200 last week repairing a machine.This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project.When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Which one of the following is an example of a sunk cost?

Which one of the following best describes the concept of erosion?

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?

The bid price is:

You are considering the purchase of a new machine.Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives.Whichever machine is purchased will be replaced at the end of its useful life.You should select the machine which has the:

Which one of the following costs was incurred in the past and cannot be recouped?

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

Which one of the following best describes pro forma financial statements?