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1、CHAPTER 8 Making Capital Investment Decisions I.DEFINITIONS INCREMENTAL CASH FLOWS a 1.The changes in a firms future cash flows that are a direct consequence of accepting a project are called _ cash flows.a.incremental b.stand-alone c.after-tax present value e.erosion Difficulty level:Easy EQUIVALEN
2、T ANNUAL COST e 2.The annual annuity stream of payments with the same present value as a projects costs is called the projects _ cost.a.incremental b.sunk c.opportunity d.erosion e.equivalent annual Difficulty level:Easy SUNK COSTS c 3.A cost that has already been paid,or the liability to pay has al
3、ready been incurred,is a(n):a.salvage value working capital expense.c.sunk cost.d.opportunity cost.e.erosion cost.Difficulty level:Easy OPPORTUNITY COSTS d 4.The most valuable investment given up if an alternative investment is chosen is a(n):a.salvage value working capital expense.c.sunk cost.d.opp
4、ortunity cost.e.erosion cost.Difficulty level:Easy EROSION COSTS word文档 可自由复制编辑 e 5.The cash flows of a new project that come at the expense of a firms existing projects are called:a.salvage value working capital expenses.c.sunk costs.d.opportunity costs.e.erosion costs.Difficulty level:Easy PRO FOR
5、MA FINANCIAL STATEMENTS a 6.A pro forma financial statement is one that:a.projects future years operations.b.is expressed as a percentage of the total assets of the firm.c.is expressed as a percentage of the total sales of the firm.d.is expressed relative to a chosen base years financial statement.e
6、.reflects the past and current operations of the firm.Difficulty level:Easy MACRS DEPRECIATION b 7.The depreciation method currently allowed under US tax law governing the accelerated write-off of property under various lifetime classifications is called _ depreciation.a.FIFO b.MACRS c.straight-line
7、 d.sum-of-years digits e.curvilinear Difficulty level:Easy DEPRECIATION TAX SHIELD c 8.The cash flow tax savings generated as a result of a firms tax-deductible depreciation expense is called the:a.after-tax depreciation savings.b.depreciable basis.c.depreciation tax shield.d.operating cash flow.e.a
8、fter-tax salvage value.Difficulty level:Easy CASH FLOW d 9.The cash flow from projects for a company is computed as the: operating cash flow generated by the project,less any sunk costs and erosion costs.b.sum of the incremental operating cash flow and after-tax salvage value of the income generated
9、 by the project,plus the annual depreciation expense.d.sum of the incremental operating cash flow,capital spending,and net working capital expenses incurred by the project.e.sum of the sunk costs,opportunity costs,and erosion costs of the project.word文档 可自由复制编辑 Difficulty level:Medium II.CONCEPTS PR
10、O FORMA INCOME STATEMENT b 10.The pro forma income statement for a cost reduction project:a.will reflect a reduction in the sales of the firm.b.will generally reflect no incremental sales.c.has to be prepared reflecting the total sales and expenses of a firm.d.cannot be prepared due to the lack of a
11、ny project related sales.e.will always reflect a negative project operating cash flow.Difficulty level:Easy INCREMENTAL CASH FLOW b 11.One purpose of identifying all of the incremental cash flows related to a proposed project is to:a.isolate the total sunk costs so they can be evaluated to determine
12、 if the project will add value to the firm.b.eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.c.make each project appear as profitable as possible for the firm.d.include both the proposed and the current operations of a firm in the anal
13、ysis of the project.e.identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.Difficulty level:Medium INCREMENTAL CASH FLOW e 12.Which of the following are examples of an incremental cash flow?I.an increase in accounts receivable II.a decr
14、ease in net working capital III.an increase in taxes IV.a decrease in the cost of goods sold a.I and III only b.III and IV only c.I and IV only d.I,III,and IV only e.I,II,III,and IV Difficulty level:Medium INCREMENTAL CASH FLOW c 13.Which one of the following is an example of an incremental cash flo
15、w?a.the annual salary of the company president which is a contractual obligation b.the rent on a warehouse which is currently being utilized c.the rent on some new machinery that is required for an upcoming project d.the property taxes on the currently owned warehouse which has been sitting idle but
16、 is going to be utilized for a new project e.the insurance on a company-owned building which will be utilized for a new project word文档 可自由复制编辑 Difficulty level:Medium INCREMENTAL COSTS d 14.Project analysis is focused on _ costs.a.sunk b.total c.variable d.incremental e.fixed Difficulty level:Medium
17、 SUNK COST c 15.Sunk costs include any cost that:a.will change if a project is undertaken.b.will be incurred if a project is accepted.c.has previously been incurred and cannot be changed.d.is paid to a third party and cannot be refunded for any reason whatsoever.e.will occur if a project is accepted
18、 and once incurred,cannot be recouped.Difficulty level:Easy SUNK COST d 16.You spent$500 last week fixing the transmission in your car.Now,the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model.In analyzing the brake situation,the$500 you spen
19、t fixing the transmission is a(n)_ cost.a.opportunity b.fixed c.incremental d.sunk e.relevant Difficulty level:Easy EROSION b 17.Erosion can be explained as the:a.additional income generated from the sales of a newly added product.b.loss of current sales due to a new project being implemented.c.loss
20、 of revenue due to employee theft.d.loss of revenue due to customer theft.e.loss of cash due to the expenses required to fix a parking lot after a heavy rain storm.Difficulty level:Easy EROSION a 18.Which of the following are examples of erosion?I.the loss of sales due to increased competition in th
21、e product market II.the loss of sales because your chief competitor just opened a store across the street from your store word 文档 可自由复制编辑 III.the loss of sales due to a new product which you recently introduced IV.the loss of sales due to a new product recently introduced by your competitor a.III on
22、ly b.III and IV only c.I,III and IV only d.II and IV only e.I,II,III,and IV Difficulty level:Medium TYPES OF COSTS d 19.Which of the following should be included in the analysis of a project?I.sunk costs II.opportunity costs III.erosion costs IV.incremental costs a.I and II only b.III and IV only c.
23、II and IV only d.II,III,and IV only e.I,II,and IV only Difficulty level:Medium NET WORKING CAPITAL d 20.All of the following are anticipated effects of a proposed project.Which of these should be included in the initial project cash flow related to net working capital?I.an inventory decrease of$5,00
24、0 II.an increase in accounts receivable of$1,500 III.an increase in fixed assets of$7,600 IV.a decrease in accounts payable of$2,100 a.I and II only b.I and III only c.II and IV only d.I,II,and IV only e.I,II,III,and IV Difficulty level:Medium NET WORKING CAPITAL a 21.Changes in the net working capi
25、tal:a.can affect the cash flows of a project every year of the projects life.b.only affect the initial cash flows of a project.c.are included in project analysis only if they represent cash outflows.d.are generally excluded from project analysis due to their irrelevance to the total project.e.affect
26、 the initial and the final cash flows of a project but not the cash flows of the middle years.Difficulty level:Medium word文档 可自由复制编辑 NET WORKING CAPITAL c 22.Which one of the following will decrease net working capital of a firm?a.a decrease in accounts payable b.an increase in inventory c.a decreas
27、e in accounts receivable d.an increase in the firms checking account balance e.a decrease in fixed assets Difficulty level:Easy NET WORKING CAPITAL d 23.Net working capital:a.can be ignored in project analysis because any expenditure is normally recouped by the end of the project.b.requirements gene
28、rally,but not always,create a cash inflow at the beginning of a project.c.expenditures commonly occur at the end of a project.d.is frequently affected by the additional sales generated by a new project.e.is the only expenditure where at least a partial recovery can be made at the end of a project.Di
29、fficulty level:Easy MACRS d 24.A company which uses the MACRS system of depreciation:a.will have equal depreciation costs each year of an assets life.b.will expense the cost of nonresidential real estate over a period of 7 years.c.can depreciate the cost of land,if they so desire.d.will write off th
30、e entire cost of an asset over the assets class life.e.cannot expense any of the cost of a new asset during the first year of the assets life.Difficulty level:Easy MACRS a 25.Bet r Bilt Toys just purchased some MACRS 5-year property at a cost of$230,000.Which of the following will correctly give you
31、 the book value of this equipment at the end of year 2?MACRS 5-year property Year Rate 1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76%I.52%of the asset cost II.48%of the asset cost III.68%of 80%of the asset cost IV.the asset cost,minus 20%of the asset cost,minus 32%of 80%of the asset cost a.II only
32、word文档 可自由复制编辑 b.III and IV only c.I and III only d.II and IV only e.I,II,III,and IV Difficulty level:Easy MACRS e 26.Will Do,Inc.just purchased some equipment at a cost of$650,000.What is the proper methodology for computing the depreciation expense for year 3 if the equipment is classified as 5-ye
33、ar property for MACRS?MACRS 5-year property Year Rate 1 20.00%2 32.00%3 19.20%4 11.52%5 11.52%6 5.76%a.$650,000 (1-.20)(1-.32)(1-.192)b.$650,000 (1-.20)(1-.32)c.$650,000 (1+.20)(1+.32)(1+.192)d.$650,000 (1-.192)e.$650,000 .192 Difficulty level:Medium BOOK VALUE d 27.The book value of an asset is pri
34、marily used to compute the:a.annual depreciation tax shield.b.amount of cash received from the sale of an asset.c.amount of tax saved annually due to the depreciation expense.d.amount of tax due on the sale of an asset.e.change in depreciation needed to reflect the market value of the asset.Difficul
35、ty level:Easy SALVAGE VALUE c 28.The salvage value of an asset creates an after-tax cash inflow to the firm in an amount equal to the:a.sales price of the asset.b.sales price minus the book value.c.sales price minus the tax due based on the sales price minus the book value.d.sales price plus the tax
36、 due based on the sales price minus the book value.e.sales price plus the tax due based on the book value minus the sales price.Difficulty level:Easy word 文档 可自由复制编辑 SALVAGE VALUE e 29.The pre-tax salvage value of an asset is equal to the:a.book value if straight-line depreciation is used.b.book val
37、ue if MACRS depreciation is used.c.market value minus the book value.d.book value minus the market value.e.market value.Difficulty level:Easy PROJECT OCF a 30.A projects operating cash flow will increase when:a.the depreciation expense increases.b.the sales projections are lowered.c.the interest exp
38、ense is lowered.d.the net working capital requirement increases.e.the earnings before interest and taxes decreases.Difficulty level:Easy PROJECT CASH FLOWS c 31.The cash flows of a project should:a.be computed on a pre-tax basis.b.include all sunk costs and opportunity costs.c.include all incrementa
39、l costs,including opportunity costs.d.be applied to the year when the related expense or income is recognized by GAAP.e.include all financing costs related to new debt acquired to finance the project.Difficulty level:Easy PROJECT OCF a 32.Which of the following are correct methods for computing the
40、operating cash flow of a project assuming that the interest expense is equal to zero?I.EBIT+Depreciation-Taxes II.EBIT+Depreciation+Taxes III.Net Income+Depreciation IV.(Sales Costs)(Taxes+Depreciation)(1-Taxes)a.I and III only b.II and IV only c.II and III only d.I,III,and IV only e.II,III,and IV o
41、nly Difficulty level:Medium BOTTOM-UP OCF b 33.The bottom-up approach to computing the operating cash flow applies only when:a.both the depreciation expense and the interest expense are equal to zero.b.the interest expense is equal to zero.c.the project is a cost-cutting project.d.no fixed assets ar
42、e required for the project.word文档 可自由复制编辑 e.taxes are ignored and the interest expense is equal to zero.Difficulty level:Medium TOP-DOWN OCF a 34.The top-down approach to computing the operating cash flow:a.ignores all noncash items.b.applies only if a project produces sales.c.can only be used if th
43、e entire cash flows of a firm are included.d.is equal to sales-costs-taxes+depreciation.e.includes the interest expense related to a project.Difficulty level:Medium TAX SHIELD d 35.An increase in which one of the following will increase the operating cash flow?a.employee salaries b.office rent c.bui
44、lding maintenance d.equipment depreciation e.equipment rental Difficulty level:Easy TAX SHIELD c 36.Tax shield refers to a reduction in taxes created by:a.a reduction in sales.b.an increase in interest expense.c.noncash expenses.d.a projects incremental expenses.e.opportunity costs.Difficulty level:
45、Easy COST-CUTTING c 37.A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n)_ project.a.sunk cost b.opportunity c.cost-cutting d.revenue-cutting e.revenue-generating Difficulty level:Easy EQUIVALENT ANNUAL COST c 38
46、.Tonis Tools is comparing machines to determine which one to purchase.The machines sell for differing prices,have differing operating costs,differing machine lives,and will be replaced when worn out.These machines should be compared using: present value only.b.both net present value and the internal
47、 rate of return.word文档 可自由复制编辑 c.their effective annual costs.d.the depreciation tax shield approach.e.the replacement parts approach.Difficulty level:Medium EQUIVALENT ANNUAL COST e 39.The equivalent annual cost method is useful in determining:a.the annual operating cost of a machine if the annual
48、maintenance is performed versus when the maintenance is not performed as recommended.b.the tax shield benefits of depreciation given the purchase of new assets for a project.c.operating cash flows for cost-cutting projects of equal duration.d.which one of two machines to acquire given equal machine
49、lives but unequal machine costs.e.which one of two machines to purchase when the machines are mutually exclusive,have different machine lives,and will be replaced once they are worn out.Difficulty level:Medium III.PROBLEMS RELEVANT CASH FLOWS d 40.Marshalls&Co.purchased a corner lot in Eglon City fi
50、ve years ago at a cost of$640,000.The lot was recently appraised at$810,000.At the time of the purchase,the company spent$50,000 to grade the lot and another$4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking.The