Chapter007(2)

Chapter007(2) - CHAPTER 7 Making Capital Investment...

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CHAPTER 7 Making Capital Investment Decisions Multiple Choice Questions: I. DEFINITIONS INCREMENTAL CASH FLOWS a 1. The changes in a firm’s future cash flows that are a direct consequence of accepting a project are called _____ cash flows. a. incremental b. stand-alone c. after-tax d. net present value e. erosion Difficulty level: Easy EQUIVALENT ANNUAL COST e 2. The annual annuity stream of payments with the same present value as a project’s costs is called the project’s _____ 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 already been incurred, is a(n): a. salvage value expense. b. net 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 expense. b. net working capital expense. c. sunk cost. d. opportunity cost. e. erosion cost. Difficulty level: Easy 7-1
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EROSION COSTS e 5. The cash flows of a new project that come at the expense of a firm’s existing projects are called: a. salvage value expenses. b. net working capital expenses. c. sunk costs. d. opportunity costs. e. erosion costs. Difficulty level: Easy PRO FORMA 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 year’s financial statement. e. 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 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 firm’s tax-deductible depreciation expense is called the: a. after-tax depreciation savings. b. depreciable basis. c. depreciation tax shield. d. operating cash flow. e. after-tax salvage value. Difficulty level: Easy 7-2
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CASH FLOW d 9. The cash flow from projects for a company is computed as the: a. net 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 project. c. net income generated 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.
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Chapter007(2) - CHAPTER 7 Making Capital Investment...

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