Question 1

A cash flow analysis can safely ignore any cash flow changes that the project might create elsewhere in the company.

Accepted Answer

A cash flow analysis should consider the impact of the project on the entire company's cash flows, as the project may affect other areas of the business. Ignoring these potential impacts could lead to an inaccurate cash flow analysis.

Question 2

When replacing an existing asset,the cash inflow associated with the sale of the old asset and any related tax effects must be considered and accounted for in the analysis.

Accepted Answer

When replacing an existing asset, the cash inflow from the sale of the old asset and any related tax effects must be taken into account in the analysis to calculate the net cash outflow/inflow and the impact on the company's financial position.

Question 3

Project cash flows used in the capital budgeting decision include all of the following EXCEPT
A)past research and development costs.
B)depreciation.
C)increase in capital expenditures.
D)changes in working capital.

Accepted Answer

Past research and development costs are not relevant to the project cash flows used in capital budgeting because they are sunk costs that have already been incurred and cannot be recovered. The other options (depreciation, increase in capital expenditures, and changes in working capital) can all affect the cash flows of the project and are therefore important to consider in capital budgeting decisions.

Question 4

Briefly explain why each of the following should or should not be considered in forecasting incremental cash flows from a project:
a.The cost of building a prototype of a new product to see if it was feasible.
b.Market research suggests that after buying a company's smartphone customers will begin to buy more of the same company's notebook computers.
c.A company decides to use existing space for storage.The company could have rented the space to another business for $2,500 a month.

Accepted Answer

The answer of Briefly explain why each of the following...

Question 5

Thaler & Co.anticipates an increase of $1,000,000 in Net Operating Income from first year sales of a new product.Taxes will be $350,000 and the company took $150,000 in depreciation expense.Operating cash flow equals
A)$1,000,000
B)$500,000
C)$800,000
D)$650,000

Accepted Answer

Operating Cash Flow (OCF) = Net Operating Income + Depreciation - Taxes
OCF = $1,000,000 + $150,000 - $350,000
OCF = $800,000

Question 6

AGL Limited is evaluating the construction of a gas pipeline to bring natural gas from Western New South Wales to Sydney.The controller argues that depreciation has to be included among the expenses.The Treasurer argues that depreciation is irrelevant because it does not affect cash flow.Who is correct?

Accepted Answer

The answer of AGL Limited is evaluating the construction of...

Question 7

AGL Limited is evaluating the construction of a gas pipeline to bring natural gas from Western New South Wales to Sydney.The controller argues that every project of the company has to absorb a portion of administrative overhead including corporate headquarters and executive salaries.The Treasurer argues that these costs are irrelevant because they are merely being shifted from part of the company to another.Who is correct?

Accepted Answer

The answer of AGL Limited is evaluating the construction of...

Question 8

Brookfield Multiplex has estimated that a new building will cost $2,500,000 to construct.Land was purchased a year ago for $500,000 and could be sold today for $550,000.An environmental impact study required by the state was performed at a cost of $48,000.For capital budgeting purposes,what is the relevant cost of the new building?
A)$2,500,000
B)$3,048,000
C)$3,050,000
D)$3,098,000

Accepted Answer

The relevant cost of the new building is the cost that will be incurred if the project goes ahead. The cost of the land is not relevant since it has already been purchased and can be sold regardless of whether the new building is constructed or not. The cost of the environmental impact study is a sunk cost and is not relevant for future decision-making. Therefore, the only relevant cost is the cost of constructing the new building, which is $2,500,000. Adding the irrelevant costs (land and environmental impact study), the total cost would be $3,050,000. Therefore, the best choice is option C.

Question 9

Victoria Citrus will finance a new organic juice production facility with a $10,000,000 bond issue.Interest on the bonds will be $637,500 per year for the useful life of the project.Should the interest payments be subtracted from the project's incremental cash flows?

Accepted Answer

The answer of Victoria Citrus will finance a new organic...

Question 10

To be conservative,capital budgeting analysis assumes that projects cannot add sales to existing lines of business.

Accepted Answer

Capital budgeting analysis does not assume that projects cannot add sales to existing lines of business. In fact, one of the factors considered in the analysis is the potential for a project to generate additional revenue for the company.

Question 11

In making a capital budgeting decision,we only include the incremental cash flows resulting from the investment decision.

Accepted Answer

We only consider the incremental cash flows resulting from the investment decision and not the sunk costs, opportunity costs, or overhead costs in making a capital budgeting decision.

Question 12

Sunk costs are a type of incremental cash flow that should be included in all capital budgeting decisions.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, and therefore should not be considered in future capital-budgeting decisions which focus on incremental cash flows.

Question 13

Mr.Smith included the cost of test marketing before production in the calculation of the initial outlay Apparently,Mr.Smith does not understand the concept of
A)side-effect costs.
B)opportunity costs.
C)sunk costs.
D)variable costs.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. Test marketing costs fall under this category as they are expenses that have already been spent and cannot be reversed. Including sunk costs in the calculation of initial outlay would lead to an inaccurate representation of the actual costs of the project as these costs are not relevant to future decision making.

Question 14

In measuring cash flows we are interested only in the incremental after-tax cash flows that are attributed to the investment proposal being evaluated.

Accepted Answer

This statement is correct. When evaluating an investment proposal, we are only interested in the cash flows that are directly attributed to the proposal and are relevanet to making investment decisions. We also consider after-tax cash flows, as they take into account the impact of taxes on the investment's profitability.

Question 15

Burbank Construction has estimated the following revenues and expenses related to phase I of a proposed new housing development.Incremental sales= $5,000,000,total cash operating expenses $3,500,000,depreciation $500,000,taxes 35%,interest expense,$200,000.Operating cash flow equals
A)$650,000
B)$1,000,000
C)$1,150,000
D)$975,000

Accepted Answer

Operating cash flow can be calculated using the following formula:

Cash flow = Incremental sales - Total cash operating expenses - Depreciation

Cash flow = $5,000,000 - $3,500,000 - $500,000

Cash flow = $1,000,000

Next, we need to calculate the taxes and interest expense:

Taxes = 35% * ($1,000,000 - $500,000)

Taxes = $175,000

Operating cash flow = Cash flow - Taxes - Interest expense

Operating cash flow = $1,000,000 - $175,000 - $200,000

Operating cash flow = $625,000

Therefore, the correct answer is C.

Question 16

Victoria Citrus is evaluating the introduction of a new line of organic juice products.Market research suggests that approximates 1/3 of sales of the new products will come at the expense of existing product lines.How should this "cannibalization effect" be incorporated into the analysis?

Accepted Answer

The answer of Victoria Citrus is evaluating the introduction of...

Question 17

The pertinent issue for determining whether overhead costs should be part of a project's relevant after-tax cash flow is whether the project benefits from the overhead items.

Accepted Answer

The answer of The pertinent issue for determining whether overhead...

Question 18

When determining how much overhead cost to include in incremental cash flows for a capital budgeting decision,the allocation of overhead by the accounting department based on percentage of space used by a project should always be used.

Accepted Answer

Allocation of overhead based on percentage of space used by a project may not represent the true cost of overhead attributable to the project. A more appropriate method would be to allocate overhead based on direct labor hours, machine hours or other activity-based drivers that better reflect the actual consumption of overhead resources by the project.

Question 19

A company converts space to use as a manufacturing facility.Previously it was rented to another company as a warehouse.This is an example of a sunk cost.

Accepted Answer

This is not an example of a sunk cost. The cost of converting the space to a manufacturing facility is a relevant cost that will affect the company's future cash flows. The fact that the space was previously used as a warehouse is not relevant to this decision.

Question 20

Synergistic effects should be included in the project's cash flow.

Accepted Answer

Synergistic effects refer to additional benefits or cost savings that result from implementing a project alongside other projects or initiatives. These effects can impact the project's cash flow and should be considered when evaluating the financial viability of the project.

Quiz 12: Analysing Project Cash Flows