FF Qs & As Topic 4 Part 2 - Feedback Forum Topc 4...

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Unformatted text preview: Feedback Forum Topc 4 Capital Budgeting Part 2 Question 1 Increased depreciation expenses affect tax-related cash-flows by a) increasing taxable income, thus increasing taxes b) decreasing taxable income, thus reducing taxes c) decreasing taxable income, with no effect on cash flow since depreciation is a non-cash expense d) none of the above o depreciation is a non-cash expense (i.e. it does not involve a cash- (out) flow) it is included as an expense in the P&L Statement as it is an expense it reduces profit, thereby reducing tax bill tax paid is included as an outflow in the CF Statement Therefore, depreciation lower profit lower tax lower cash-outflow 1 2 Question 2 Which of the following is an incorrect statement regarding project evaluation analysis? a) Depreciation results in a cash inflow b) The book gain on disposal of an asset results in a cash inflow c) Salvage value is treated as a cash inflow d) Dividend payments are not taken into account as part of the cash flows book gain on disposal of an asset represents a profit the book gain (or loss) on disposal of an asset is included as a revenue (expense) in the P&L Statement (in the CF Statement the full salvage value/sale price of the asset is recorded as a cash-inflow) because book gain is a profit tax must be paid on it the tax paid on the book gain will increase tax paid overall, leading to a higher cash-outflow in the CF Statement as Tax Paid 3 Question 3 A company is considering a proposed expansion to its facilities. Which of the following statements is most correct? a) In calculating the project's operating cash flows, the firm should not subtract out financing costs such as interest expense, since these costs are already included in the cost of capital used to discount the projects net cash flows. b) Since depreciation is a non-cash expense, the firm does not need to know the depreciation rate when calculating the operating cash flows. c) When estimating the projects operating cash flows, it is important to include any opportunity costs and sunk costs, but the firm should ignore cash flows from externalities since they are accounted for elsewhere. d) Statements a and c are correct. a) is correct because: finance costs, such as interest expense on debt and dividend payments on equity, are not regarded as incremental cash-flows in project evaluation financing costs are not explicitly accounted for in the CF Statement. finance costs are taken into account via the discount rate/opportunity...
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This note was uploaded on 04/24/2011 for the course BAFI 1012 taught by Professor Michaelgangemi during the Three '10 term at Royal Melbourne Institute of Technology.

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FF Qs & As Topic 4 Part 2 - Feedback Forum Topc 4...

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