Question 1

The sale of an asset below its book value at the time of sale generates cash inflows that exceed the asset's selling price.

Accepted Answer

The answer of The sale of an asset below its...

Question 2

An increase in a firm's annual depreciation expense that results from replacing an existing asset with a new asset can increase the firm's annual cash inflows.

Accepted Answer

The increase in depreciation expense reduces taxable income, which in turn reduces the amount of taxes a firm has to pay. This reduction in taxes increases the firm's net cash inflow.

Question 3

It is generally best to forecast revenue with unit and price detail.

Accepted Answer

Forecasting revenue with unit and price detail provides more accurate and detailed information, as it takes into account both the quantity of units sold and the price at which they are sold. This level of detail can help businesses make more informed decisions and better plan for the future.

Question 4

All capital budgeting cash flows must be stated after tax.

Accepted Answer

According to standard practice, capital budgeting cash flows should be stated after tax, as tax expenses can have a significant impact on the overall profitability of a capital investment project.

Question 5

The relevance of a sunk cost to the evaluation of a capital budgeting project depends on how recently in the past the cost was incurred.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, and therefore should not influence the decision-making process for future investments or projects, regardless of how recently they were incurred.

Question 6

Of the two processes involved in capital budgeting, cash flow estimation and the application of analytical techniques like NPV and IRR, the more difficult is the application of the analytical techniques.

Accepted Answer

While cash flow estimation requires careful consideration and forecasting of future cash flows, the application of analytical techniques like NPV and IRR involves mathematical calculations that can be easily learned and applied.

Question 7

Since it has no tax effect, the increase in a firm's net working capital that is required by a capital investment should be ignored in the valuation of the investment.

Accepted Answer

The increase in a firm's net working capital that is required by a capital investment should be taken into account in the valuation of the investment. While it may not have a direct tax effect, it does have an impact on the cash flow and overall financial health of the firm, which should be considered in the investment decision.

Question 8

Proceeds from the sale of old equipment are generally not considered when estimating cash flows.

Accepted Answer

Proceeds from the sale of old equipment are considered as cash inflows and should be included when estimating cash flows.

Question 9

Accelerated depreciation follows the half-year convention. That is, assets receive a half-year of depreciation in the 1st year and the remaining half-year of depreciation in the T+1 year where T is the designated life of the asset.

Accepted Answer

This statement is true. Accelerated depreciation follows the half-year convention where assets receive half-year depreciation in the year of acquisition and the remaining half-year in the next year.

Question 10

Taxes are important in capital investment evaluation because they affect the accounting profits generated by an investment.

Accepted Answer

The answer of Taxes are important in capital investment evaluation...

Question 11

The lost salvage value of an asset replaced prior to the end of its useful life is a sunk cost.

Accepted Answer

The lost salvage value is considered an opportunity cost because it represents the potential income or value lost by replacing the asset early, not a sunk cost which is a cost already incurred and cannot be recovered.

Question 12

An opportunity cost must be included in the cash flow estimate when using a resource requires foregoing real or potential alternative income, even though no cash is spent to obtain the resource.

Accepted Answer

An opportunity cost is the value of the next-best alternative that must be foregone in order to pursue a certain action. When using a resource that could be used to generate alternative income, the forgone income represents the opportunity cost, which must be accounted for in the cash flow estimate.

Question 13

Sunk costs are monies that have already been spent at the time of the capital project analysis and cannot influence the future regardless of the decisions about the project.

Accepted Answer

Sunk costs are defined as costs that have already been incurred and cannot be recovered regardless of the decision made. Therefore, they should not be considered in a capital project analysis because they have no effect on the future outcomes of the project.

Question 14

The impact of a project on cash flows in other parts of the business is outside of the project's scope and therefore need not be considered in estimating the project's cash flows.

Accepted Answer

The impact of a project on cash flows in other parts of the business should be considered in estimating the project's cash flows because it can affect the overall financial health of the company.

Question 15

Sunk costs are irrelevant to capital investment evaluation because such evaluation is oriented toward the future.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They are irrelevant to capital investment evaluation because the focus is on future costs and benefits, not past costs. The decision to invest in a project should be based on the expected future cash flows and the cost of the investment, not on past costs that are already spent and cannot be recovered.

Question 16

Sunk costs, but not taxes, are irrelevant to the evaluation of a capital budgeting project.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They are irrelevant to the evaluation of a capital budgeting project because they are not incremental costs that will change as a result of the decision to undertake the project. Taxes, on the other hand, are relevant to the evaluation of a capital budgeting project because they can impact the cash flows of the project.

Question 17

In the case of a replacement proposal, there are no tax effects reflected in the initial cash flows.

Accepted Answer

The answer of In the case of a replacement proposal,...

Question 18

If a project requires a plant addition that replaces an existing structure, then the cash inflow from the disposal of the existing structure must be counted as part of the project's initial outlay.

Accepted Answer

When a project involves replacing an existing structure with a new plant addition, the cash inflow from the disposal of the old structure is considered part of the initial outlay for the project. This is because the sale of the old structure is a cash flow that is directly related to the project and is necessary to fund the new plant addition.

Question 19

All capital budgeting techniques ignore the time value of money.

Accepted Answer

Capital budgeting techniques do consider the time value of money, which is why they involve discounting future cash flows to their present value using a chosen discount rate. This is a central concept in finance and is essential in making investment decisions.

Question 20

It's important to keep the distinction between earnings and cash flows in mind when doing project projections. Managers invariably want to know the net income impact of projects as well as the results of the capital budgeting analysis.

Accepted Answer

It is important to keep the distinction between earnings and cash flows in mind when doing project projections. Managers want to know both the net income impact and the results of the capital budgeting analysis.

Quiz 11: Cash Flow Estimation