Question 1

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 2

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 affects net working capital as it represents a change in current assets, which is a component of net working capital.

Question 3

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 involve an actual outflow of cash. This means that operating cash flow will be higher than net income because it does not consider the non-cash expenses such as depreciation.

Question 4

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

Accepted Answer

Opportunity costs refer to the benefits that are foregone by choosing one option over the other. Including opportunity costs in project analysis is important as it helps in making better decisions about resource allocation and priority setting. Ignoring opportunity costs may result in overlooking better alternatives that could have been pursued with the same resources.

Question 5

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 6

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

Any costs associated with bringing an idle asset into use, such as surveying the lot for a required drainage pond, should be included in the analysis of a project that would use that asset.

Question 7

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

Accepted Answer

The cash flows of a project should include the changes in fixed assets, such as the purchase or disposal of equipment, buildings or land, as these changes affect the project's cash flows.

Question 8

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

The firm must collect all accounts receivables to recover the cash tied up in net working capital, which includes receivables.

Question 9

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

Accepted Answer

A decrease in net working capital represents a cash outflow and is considered an incremental cash flow in financial analysis.

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

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

Accepted Answer

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

Question 12

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

Net working capital investment includes inventory, so if the firm sells all of the inventory related to the project at a price equal to cost, it will recapture 100% of its net working capital investment.

Question 13

Opportunity costs are considered cash ﬂows of a project.

Accepted Answer

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

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 be compiled on a stand-alone basis to determine the financial viability of the project without including the financial impact of any existing businesses or projects.

Question 15

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 - taxes + depreciation.

Question 16

Taxes causes operating cash ﬂow to differ from net income.

Accepted Answer

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

Question 17

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

Since the building is an asset that the company owns, its market value should be considered in any project analysis that involves the use or potential sale of the building.

Question 18

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 net working capital investment only requires selling the current assets of the project, not the fixed assets. The sale of fixed assets will only recapture a portion of the total investment, depending on their book value and the price they can be sold for.

Question 19

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 cash flow during the period they occur, not in the final cash flow.

Question 20

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

If the additions to net working capital are to be recovered at the end, then their present value would be equal to their future value. Therefore, the present value of the net working capital recovery would be equal to the total dollar outlays on net working capital.

Quiz 10: Making Capital Investment Decisions

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.

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.

Depreciation causes operating cash ﬂow to differ from net income.

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

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

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

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.

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

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

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.

Opportunity costs are considered cash ﬂows of a project.

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

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

Taxes causes operating cash ﬂow to differ from net income.

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.

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

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.

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.