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Chapter 010 Making Capital Investment Decisions Multiple Choice Questions 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 SECTION: 10.1 TOPIC: INCREMENTAL CASH FLOWS TYPE: DEFINITIONS 2. The evaluation of a project based solely on its incremental cash flows is the basis of the: a. future cash flow method. B . stand-alone principle. c. dividend growth model. d. salvage value model. e. equivalent cost principle. SECTION: 10.1 TOPIC: STAND-ALONE PRINCIPLE TYPE: DEFINITIONS 3. A cost that has already been incurred and cannot be recouped is a(n): a. salvage value expense. b. net working capital expense. C . sunk cost. d. opportunity cost. e. erosion cost. SECTION: 10.2 TOPIC: SUNK COSTS TYPE: DEFINITIONS 10-1
Chapter 010 Making Capital Investment Decisions 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. SECTION: 10.2 TOPIC: OPPORTUNITY COSTS TYPE: DEFINITIONS 5. Erosion is best described as: a. expenses that have already been incurred and cannot be reversed. b. net working capital expenses. C . the cash flows of a new project that come at the expense of a firm's existing cash flows. d. the next alternative that is forfeited when a fixed asset is utilized for a project. e. the differences in a firm's cash flows with and without a particular project. SECTION: 10.2 TOPIC: EROSION TYPE: DEFINITIONS 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 a firm. SECTION: 10.3 TOPIC: PRO FORMA FINANCIAL STATEMENTS TYPE: DEFINITIONS 10-2
Chapter 010 Making Capital Investment Decisions 7. The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called: a. FIFO. B . MACRS. c. straight-line depreciation. d. sum-of-years depreciation. e. erosion. SECTION: 10.4 TOPIC: MACRS DEPRECIATION TYPE: DEFINITIONS 8. The tax savings generated as a result of a firm's depreciation expense is called the: a. aftertax depreciation savings. b. depreciable basis. C . depreciation tax shield. d. operating cash flow. e. aftertax salvage value. SECTION: 10.5 TOPIC: DEPRECIATION TAX SHIELD TYPE: DEFINITIONS 9. 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 SECTION: 10.6 TOPIC: EQUIVALENT ANNUAL COST TYPE: DEFINITIONS 10-3
Chapter 010 Making Capital Investment Decisions 10. Lester's Dairy gathers and processes cow's milk for distribution to retail outlets. Lester's is currently considering processing goat's milk as well. Which one of the following is most apt to be an incremental cash flow related to the goat milk project? a. processing the goat's milk in the same building as the cow's milk
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