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1、CHAPTER 8 Making Capital Investment DecisionsI. DEFINITIONSINCREMENTAL CASH FLOWSa 1. The changes in a firms future cash flows that are a direct consequence of accepting a project are called cash flows.a. incrementalb. stand-alonec. after-taxd. net present valuee. erosionDifficulty level: EasyEQUIVA
2、LENT ANNUAL COSTe 2. The annual annuity stream of payments with the same present value as a projects costs is called the projects cost.a. incrementalb. sunkc. opportunityd. erosione. equivalent annualDifficulty level: EasySUNK COSTSc 3. A cost that has already been paid, or the liability to pay has
3、already been incurred, is a(n)：a. salvage value expense.b. net working capital expense.c. sunk cost.d. opportunity cost.e. erosion cost.Difficulty level: EasyOPPORTUNITY COSTSd 4. The most valuable investment given up if an alternative investment is chosen is a(n):a. salvage value expense.b. net wor
4、king capital expense.c. sunk cost.d. opportunity cost.e. erosion cost.Difficulty level: EasyEROSION COSTSe 5.The cash flows of a new project that come at the expense of a firms existing projectsare called:salvage value working capital expenses. b.sunk costs.c.opportunity costs. d.erosion costs.e.Di
5、fficulty level: EasyPRO FORMA FINANCIAL STATEMENTSA pro forma financial statement is one that: a 6.projects future years operationsa.is expressed as a percentage of the total assets of the firm. b.is expressed as a percentage of the total sales of the firm. c.d. is expressed relative to a chosen bas
6、e years financial statementreflects the past and current operations of the firm. e.Difficulty level: EasyMACRS DEPRECIATIONThe depreciation method currently allowed under US tax law governing the acceleratedb 7.write-off of property under various lifetime classifications is called depreciation.FIFO
7、a.MACRS b.straight-line c.sum-of-years digits d.curvilinear e.Difficulty level: EasyDEPRECIATION TAX SHIELD-deductible depreciation8. The cash flow tax savings generated as a result of a firms taxcexpense is called the:after-tax depreciation savings. a.depreciable basis. b.depreciation tax shield. c
8、.operating cash flow. d.after-tax salvage value. e.Difficulty level: EasyCASH FLOWThe cash flow from projects for a company is computed as the: d operating cash flow generated by the project, less any sunk costs and erosion costs. a.sum of the incremental operating cash flow and after -tax salvage
9、value of the project. income generated by the project, plus the annual depreciation expense. c.sum of the incremental operating cash flow, capital spending, and net working capitald.expenses incurred by the project.sum of the sunk costs, opportunity costs, and erosion costs of the project. e.Diffic
10、ulty level: MediumII. CONCEPTSPRO FORMA INCOME STATEMENTb 10. The pro forma income statement for a cost reduction project:a. will reflect a reduction in the sales of the firm.b. will generally reflect no incremental sales.c. has to be prepared reflecting the total sales and expenses of a firm.d. can
11、not be prepared due to the lack of any project related sales.e. will always reflect a negative project operating cash flow.Difficulty level: EasyINCREMENTAL CASH FLOWb 11. One purpose of identifying all of the incremental cash flows related to a proposed project is to:a. isolate the total sunk costs
12、 so they can be evaluated to determine if the project will add value to the firm.b. eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.c. make each project appear as profitable as possible for the firm.d. include both the proposed and the
13、 current operations of a firm in the analysis of theproject.e. identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.Difficulty level: MediumINCREMENTAL CASH FLOWe 12. Which of the following are examples of an incremental cash flow?I. an
14、 increase in accounts receivableII. a decrease in net working capitalIII. an increase in taxesIV. a decrease in the cost of goods solda. I and III onlyb. III and IV onlyc. I and IV onlyd. I, III, and IV onlye. I, II, III, and IVDifficulty level: MediumINCREMENTAL CASH FLOWc 13. Which one of the foll
15、owing is an example of an incremental cash flow?a. the annual salary of the company president which is a contractual obligationb. the rent on a warehouse which is currently being utilizedc. the rent on some new machinery that is required for an upcoming projectd. the property taxes on the currently owned warehouse which has been sitting idle butis going to be utilized for a new projectthe insurance on a company-owned building which will be utilized for a new projecte.Difficulty level: MediumINCREMENTAL COSTSd 14.
