Question 1

If a firm wishes to recapture 100% of its net working capital investment in a project, the firm will have to sell all of the inventory related to the project at a price at least equal to the cost.

Accepted Answer

To recapture 100% of its net working capital investment, a firm must recover all costs associated with the project, including the full cost of inventory. Selling the inventory at cost ensures no loss on the inventory portion of the working capital.

Question 2

Depreciation causes operating cash flow to differ from net income.

Accepted Answer

Depreciation is a non-cash expense that reduces net income but does not affect cash flow, causing operating cash flow to differ from net income.

Question 3

Opportunity costs should be included in the analysis of a project.

Accepted Answer

Opportunity costs represent the benefits that are foregone by choosing one alternative over another and are crucial for a comprehensive analysis of a project's economic viability.

Question 4

A company owns a building that is totally paid for. This building has been sitting idle for the past three years. Now the company is trying to analyze a project that would include the use of this building. Therefore, the current market value of the building should be included in that analysis.

Accepted Answer

The current market value of the building should be considered as an opportunity cost in the project analysis, as it represents the value the company could realize if it chose to sell or rent the building instead of using it for the project.

Question 5

If a firm wishes to recapture 100% of its net working capital investment in a project, the firm will have to sell all of the project's fixed assets at a price at least equal to the book value of the assets

Accepted Answer

Recapturing 100% of its net working capital investment in a project does not necessarily involve selling the project's fixed assets at a price at least equal to their book value. Net working capital typically refers to current assets minus current liabilities, and recapturing this amount is independent of the sale price of fixed assets.

Question 6

The money spent to advertise the new product would normally be included in the final cash flow of a project that entailed the development and sale of a new product.

Accepted Answer

Advertising expenses are typically considered operating expenses and are accounted for in the project's income statement, not directly in the final cash flow.

Question 7

The correct formula for computing the operating cash flow of a project is EBIT + D + T.

Accepted Answer

The correct formula for computing the operating cash flow of a project is EBIT + Depreciation - Taxes.

Question 8

The cash flows of a project should include the related changes in the fixed assets.

Accepted Answer

The cash flows of a project should indeed include the related changes in fixed assets, as these are capital expenditures that impact the project's cash flow by either increasing or decreasing it.

Question 9

Assume project X requires additions to net working capital in each year of its life, all to be recovered at the end. In this case, the present value of the net working capital recovery will exceed the total dollar outlays on net working capital.

Accepted Answer

The present value of the net working capital recovery will be less than the total dollar outlays on net working capital because the recovery happens at the end of the project's life, and the value of money decreases over time due to inflation and opportunity cost.

Question 10

A company owns a building that is totally paid for. This building has been sitting idle for the past three years. Now the company is trying to analyze a project that would include the use of this building. Therefore, the insurance paid on the building over the past three years should be included in that analysis.

Accepted Answer

The insurance paid on the building over the past three years is a sunk cost and should not be included in the analysis of a new project, as sunk costs are past costs that cannot be recovered and should not influence future investment decisions.

Question 11

Taxes causes operating cash flow to differ from net income.

Accepted Answer

The answer of Taxes causes operating cash flow to differ...

Question 12

The cash flows of a project should include the related changes in the tax account.

Accepted Answer

The answer of The cash flows of a project should...

Question 13

A decrease in net working capital is an example of an incremental cash flow.

Accepted Answer

A decrease in net working capital is considered an incremental cash flow because it represents a cash inflow that would not occur without the project or investment being evaluated, thus affecting the overall cash flow analysis.

Question 14

Pro forma statements for a proposed project should be compiled on a stand-alone basis.

Accepted Answer

Pro forma statements for a proposed project should indeed be compiled on a stand-alone basis to isolate the project's financial performance and assess its viability without the influence of the company's other operations.

Question 15

Fixed costs causes operating cash flow to differ from net income.

Accepted Answer

The answer of Fixed costs causes operating cash flow to...

Question 16

If a firm wishes to recapture 100% of its net working capital investment in a project, the firm will have to pay all of the project's suppliers in full.

Accepted Answer

If a firm wishes to recapture 100% of its net working capital investment in a project, it will have to pay all of the project's suppliers in full. This is because net working capital is the difference between a firm's current assets and current liabilities. When a firm invests in a project, it typically increases its current assets (e.g., inventory, accounts receivable) and current liabilities (e.g., accounts payable). If the firm wishes to recapture 100% of its net working capital investment, it will need to collect all of its accounts receivable and pay off all of its accounts payable.

Question 17

A new project is expected to have the following effects on the financial statements of a firm. The effect of a decrease in accounts receivable should be included in the net working capital requirements for the project.

Accepted Answer

A decrease in accounts receivable increases cash flow, affecting net working capital, which is the difference between current assets and current liabilities.

Question 18

A company owns a building that is totally paid for. This building has been sitting idle for the past three years. Now the company is trying to analyze a project that would include the use of this building. Therefore, the cost to survey the lot to construct a drainage pond required for the project should be included in that analysis?

Accepted Answer

The cost to survey the lot for constructing a drainage pond is a direct cost associated with the project and should be included in the project analysis, regardless of the building's current status or payment history.

Question 19

If a firm wishes to recapture 100% of its net working capital investment in a project, the firm will have to collect all of the accounts receivables related to the project.

Accepted Answer

Net working capital investment typically includes accounts receivable among other current assets minus current liabilities. To recapture 100% of its net working capital, a firm must collect all accounts receivables related to the project, as these are part of the current assets directly tied to the project's operations.

Question 20

Opportunity costs are considered cash flows of a project.

Accepted Answer

The answer of Opportunity costs are considered cash flows of...

Quiz 10: Making Capital Investment Decisions