ch14 - Chapter 14 Estimating Project Cash Flows TRUE-FALSE...

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Chapter 14 Estimating Project Cash Flows TRUE-FALSE QUESTIONS F 1. A sunk cost is a project-related expense that is dependent upon whether or not the project is undertaken. F 2. Estimates of revenues and costs should take the business unit view, rather than the corporate view. T 3. The depreciation tax shield equals the amount of the depreciation expense multiplied by the firm’s tax rate. T 4. The depreciation tax shield is the tax reduction due to the depreciation of fixed assets. F 5. The depreciation tax shield is the tax reduction due to the depreciation of current (working capital) assets. F 6. The depreciation tax shield equals the amount of the depreciation expense multiplied by one minus the firm’s tax rate. T 7. Expansion projects involving new areas and product lines are usually associated with greater cash inflow uncertainty. F 8. Non-financial information plays no part in capital budgeting. T 9. The stand-alone principle focuses on the project’s own cash flows, uncontaminated by cash flows from the firm’s other activities. F 10. The stand-alone principle refers to the financial manager’s personal responsibility for the outcome of a capital budgeting decision. T 11. Sound capital budgeting decisions require a variety of information including internal financial data, external economic and political data, and non-financial data.
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F 12. Sound capital budgeting decisions require information only about the specific incremental cash flows associated with the project and do not factor in other information such as exchange rate changes, political and regulatory changes, or competitive analysis. T 13. The stand alone principle suggests that a project must be viewed separately from the rest of the firm. F 14. Incremental cash flows represent a project’s cash flows summed together with the firm’s other cash flows to get a total firm view of the project. T 15. Incremental cash flows represent the difference between the firm’s after-tax cash flows with the project and its base case. F 16. Enhancement occurs when a project robs cash flow from the firm’s existing line of business. T 17. Enhancement refers to the increase in the cash flows of the firm’s other products that occur because of a new project. T 18. Cannibalization occurs when a project robs cash flow from the firm’s existing line of business. F 19. Cannibalization occurs when a financial manager steals financial resources meant for other managers in order to undertake a capital budgeting project. F 20. Sunk costs are relevant in capital budgeting analysis and should be considered in calculating a project’s initial investment. T 21. Sunk costs are project-related expenses not dependent upon whether or not the project is undertaken. F
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This note was uploaded on 11/01/2011 for the course ACC 200 taught by Professor Minliu during the Spring '11 term at Universidad Europea de Madrid.

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ch14 - Chapter 14 Estimating Project Cash Flows TRUE-FALSE...

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