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FF Qs & As Topic 4 Part 2 - FeedbackForum Topc4...

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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
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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
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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 project’s 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 project’s 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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