Question 1

The initial outlay of an asset does not include installation costs.

Accepted Answer

The initial outlay of an asset does include installation costs.

Question 2

Nominal cash flows are expressed in terms of their purchasing power in a base year.

Accepted Answer

Nominal cash flows are expressed in terms of current dollars without adjusting for inflation or changes in purchasing power. Real cash flows, on the other hand, are adjusted for inflation and expressed in terms of their purchasing power in a base year.

Question 3

In 2013,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2014,volume is expected to increase by 10%,Inflation will increase the cost per unit by 3%,but to attract more buyers,Sunny will reduce the price to $950.In nominal dollars,expected gross profit for 2014 is

Accepted Answer

In 2014, the expected sales volume is 110,000 units (10% increase from 100,000 units). The cost per unit will increase by 3% from $600 to $618 (3% of $600 is $18, so $600 + $18 = $618). The selling price is reduced to $950. The gross profit per unit is $950 - $618 = $332. The total expected gross profit for 2014 is 110,000 units * $332 = $36.52 million.

Question 4

In 2013,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2014,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In real dollars,expected gross profit for 2014 is

Accepted Answer

The answer of In 2013,Sunny Electronics expects to sell 100,000...

Question 5

It is not necessary to consider depreciation in estimating cash flows for a new capital project.

Accepted Answer

Depreciation is a non-cash expense that represents the gradual decrease in value of an asset over its useful life. While it does not directly affect cash flows, it does impact taxes and therefore should be considered in estimating cash flows for a new capital project. Depreciation affects the taxable income of a company, and lower taxable income can result in lower tax liabilities and higher cash flows.

Question 6

Marguerite's Florist is considering the purchase of a new delivery van.It will cost $25,000 plus another $3,000 to have it painted in the company's characteristic floral motif.The van will be depreciated over 5 years.Compute depreciation for the second year in the useful life of the van.

Accepted Answer

The answer of Marguerite's Florist is considering the purchase of...

Question 7

The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the useful life of the project will add to the book value when assets are sold.

Accepted Answer

The depreciation method used in capital budgeting is relevant in determining the cash flows generated by the project, which is important in evaluating its profitability. The total depreciation expense over the useful life of the assets is subtracted from the revenues to determine the taxable income, which in turn determines the net cash inflow from taxes. This net cash inflow is then added to the operating cash flows to determine the total cash flows generated by the project. The book value of the assets when they are sold is irrelevant in this calculation.

Question 8

By examining cash flows,we are correctly able to analyse the timing of the benefits.

Accepted Answer

Cash flows provide information on when the benefits of a particular investment or project will be received, allowing for better analysis of its profitability and potential risks. Therefore, examining cash flows allows us to correctly analyse the timing of the benefits.

Question 9

Working capital for a project includes investment in fixed assets.

Accepted Answer

Working capital refers to the funds used to finance the day-to-day operations of a project, including inventory, accounts receivable, and accounts payable. Investment in fixed assets is typically considered a separate capital expenditure and is not included in working capital calculations.

Question 10

Why is depreciation considered in cash flow if it is not a cash expense?

Accepted Answer

The answer of Why is depreciation considered in cash flow...

Question 11

In capital budgeting,interest is excluded from cash flows.

Accepted Answer

Interest is not considered as cash flow in capital budgeting decisions since it is a financing cost and not a project expense. The focus is on evaluating the cash inflows and outflows related to the project itself.

Question 12

A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.

Accepted Answer

A marketing survey completed last year would not be part of the initial cash outflow, as it was already completed and paid for in the past. The initial cash outflow would include expenses incurred in the present, such as equipment purchases, marketing costs, and startup expenses.

Question 13

Cleanup and restoration costs required by government regulations are negative cash flows associated with a project's termination.

Accepted Answer

Cleanup and restoration costs required by government regulations are costs that need to be incurred for properly terminating a project and leaving the area in its pre-project condition. These costs are considered negative cash flows as they decrease the overall cash inflows from the project.

Question 14

Green Invest Limited discounts cash flows at a nominal rate of 10%.Inflation over the next few years is expected to average 3%.Which of the following would be a correct adjustment for inflation when computing net present value?

Accepted Answer

The answer of Green Invest Limited discounts cash flows at...

Question 15

It is possible for after-tax operating cash flows to be positive when accounting income is negative.

Accepted Answer

Accounting income is based on accrual accounting principles which recognizes revenue and expenses as they are incurred, regardless of actual cash inflows and outflows. On the other hand, after-tax operating cash flows reflect the actual cash inflows and outflows from operating activities. It is possible for a company to have negative accounting income due to various non-cash expenses, such as depreciation, but still have positive after-tax operating cash flows if there are actual cash receipts from sales and other operating activities.

Question 16

Determining whether an investment adds value starts with estimating the incremental cash flows of a project.

Accepted Answer

Estimating the incremental cash flows of a project is the first step in determining whether an investment adds value or not.

Question 17

In 2013,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2014,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In nominal dollars,expected gross profit for 2014 is

Accepted Answer

The answer of In 2013,Sunny Electronics expects to sell 100,000...

Question 18

Accounting profits represents free cash flows that are available for reinvestment.

Accepted Answer

Accounting profits are the profits that are calculated by deducting the expenses from the revenues. They do not take into account the cost of capital or the opportunity cost of foregoing alternative investments. Therefore, accounting profits do not represent the free cash flows that are available for reinvestment.

Question 19

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analysing an investment.

Accepted Answer

Increased working capital requirements represent an additional cost that needs to be considered when assessing the feasibility of an investment. By including the additional cash needed to support the increased working capital requirements in the initial cost of the project, the analysis can provide a more accurate picture of the investment's profitability and sustainability over time.

Question 20

De Bortoli Wineries is purchasing a new wine press.The equipment will cost $250,000.Transportation and installation will cost another $35,000.Because of increased production,inventories will increase by $15,000.The press will be depreciated using the straight line method to a book value of $0.00 over its useful life of 7 years.Compute depreciation for each year of the project.

Accepted Answer

The answer of De Bortoli Wineries is purchasing a new...

Quiz 12: Analysing Project Cash Flows

The initial outlay of an asset does not include installation costs.

Nominal cash flows are expressed in terms of their purchasing power in a base year.

It is not necessary to consider depreciation in estimating cash flows for a new capital project.

Marguerite's Florist is considering the purchase of a new delivery van.It will cost $25,000 plus another $3,000 to have it painted in the company's characteristic floral motif.The van will be depreciated over 5 years.Compute depreciation for the second year in the useful life of the van.

The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the useful life of the project will add to the book value when assets are sold.

By examining cash flows,we are correctly able to analyse the timing of the benefits.

Working capital for a project includes investment in fixed assets.

Why is depreciation considered in cash flow if it is not a cash expense?

In capital budgeting,interest is excluded from cash flows.

A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.

Cleanup and restoration costs required by government regulations are negative cash flows associated with a project's termination.

Green Invest Limited discounts cash flows at a nominal rate of 10%.Inflation over the next few years is expected to average 3%.Which of the following would be a correct adjustment for inflation when computing net present value?

It is possible for after-tax operating cash flows to be positive when accounting income is negative.

Determining whether an investment adds value starts with estimating the incremental cash flows of a project.

Accounting profits represents free cash flows that are available for reinvestment.

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analysing an investment.