Deck 9: Introduction to Capital Budgeting and Cash Flow Estimation

Question 1

In capital budgeting, the cost of starting a project is called the annual net cash flow.

Answer 1

False

Question 2

What is net working capital?

A)current liabilities minus current assets
B)current assets minus net fixed assets
C)current assets minus current liabilities
D)net fixed assets minus long-term liabilities

Answer 2

C

Question 3

Which one of the following is not part of the estimated net investment for a capital budgeting project?

A)the estimated salvage value of the new assets at the end of their 10-year expected economic life
B)the immediate increase in net working capital required by the project
C)the after-tax salvage value of assets to be replaced by the project
D)the cost of new assets required by the project

Answer 3

A

Question 4

Which one of the following is not a basic principle for estimating a project's net cash flows?

A)Sunk costs are relevant.
B)Cash flows should be estimated on an incremental basis.
C)Cash flows should be estimated on an after-tax basis.
D)Opportunity costs are relevant.

Question 5

Higher depreciation results in lower profit and higher net cash flow.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Question 6

Why do a project's net cash flows not include additional interest expense?

A)Interest expense is a sunk cost and thus not relevant.
B)Interest expense is not an actual cash expense.
C)Interest expense is an indirect cost and thus not relevant.
D)Interest expense is taken into account by the use of a required rate of return used in the decision method.

Question 7

If a depreciable asset is sold for less than its book value, then taxes must be paid on the difference.

Question 8

Your university is considering what to do with the current football stadium. They plan to invest to upgrade the current football stadium or invest to build a new one closer to campus. What kind of projects are these?

A)contingent projects
B)mutually exclusive projects
C)independent projects
D)none of the above

Question 9

A project's net cash flows are typically cash inflows whereas a project's net investment is typically a cash outflow.

Question 10

The after-tax salvage value from replaced assets will decrease the net investment.

Question 11

When making a capital budgeting decision, cash flows should be estimated on an incremental basis, not a total basis.

Question 12

Capital budgeting decisions are based upon cost-benefit analysis. A project's net investment is compared to the project's net cash flows in order to make a decision.

Question 13

Which of the following is a basic principle when estimating a project's cash flows?

A)Cash flows should be measured on a pretax basis.
B)Cash flows should ignore depreciation because it is a non-cash charge.
C)Only direct effects of a project should be included in cash flow calculations.
D)Cash flows should be measured on an incremental basis.

Question 14

Growth oriented capital budgeting projects typically do not require an increase in net working capital.

Question 15

Which one of the following is not part of a project's estimated net cash flows?

A)the expected loss in your firm's other businesses due to a new project
B)the cost of a customer survey performed one year before the project decision is made
C)the change in depreciation
D)the change in cash operating costs

Question 16

Which one of the following would not typically be considered a capital budgeting project for a restaurant?

A)renovating the ladies' restroom
B)installing a new fire suppression and alarm system
C)buying a new dishwashing system
D)buying toilet paper for both the ladies' and men's restrooms

Question 17

The estimation of a project's net cash flows NCF)should not include changes in

A)depreciation.
B)cash operating costs.
C)interest expense.
D)sales revenue.

Question 18

Indirect cash flows caused by a capital budgeting project are not relevant to the project investment decision.

Question 19

What impact will an increase in depreciation have upon a firm?

A)decrease profit and decrease cash flow
B)decrease profit and increase cash flow
C)increase profit and decrease cash flow
D)increase profit and increase cash flow

Question 20

A capital budgeting project's sunk costs and opportunity costs are both relevant to the project investment decision.

Question 21

Poon's Noodle House is considering replacing their noodle-processing machine. The current machine was purchased 4 years ago at a total cost of $20,000. It is being depreciated straight-line to a zero value over 8 years. If Poon sells the noodle-processing machine for $10,000, what is the after-tax cash flow to Poon's Noodle House? Use 40% for the effective tax rate.

A)$6,000
B)$4,000
C)$10,000
D)$14,000

Question 22

A project is expected to decrease a firm's cash expenses by $40,000 annually, and increase its depreciation by $25,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.

A)$31,000
B)$9,000
C)$16,000
D)$34,000

Question 23

A project is expected to increase a firm's sales revenue by $50,000 annually, increase it cash expenses by $20,000 annually, and increase its depreciation by $15,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.

A)$24,000
B)$9,000
C)$21,000
D)$33,000

Question 24

Poon's Noodle House is considering replacing their noodle-processing machine. The current machine was purchased 4 years ago at a total cost of $20,000. It is being depreciated straight-line to a zero value over 8 years. If Poon sells the noodle-processing machine for $13,000, what is the after-tax cash flow to Poon's Noodle House? Use 40% for the effective tax rate.

A)$11,800
B)$7,800
C)$11,200
D)$5,200

Question 25

A project is expected to increase a firm's sales revenue by $12,000 annually, decrease it cash expenses by $18,000 annually, and increase its depreciation by $10,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.

A)$400
B)$12,000
C)$22,000
D)$18,000

Question 26

Poon's Noodle House is considering replacing their noodle-processing machine. The current machine was purchased 4 years ago at a total cost of $20,000. It is being depreciated straight-line to a zero value over 8 years. If Poon sells the noodle-processing machine for $6,000, what is the after-tax cash flow to Poon's Noodle House? Use 40% for the effective tax rate.

A)$8,400
B)$3,600
C)$2,400
D)$7,600

Question 27

Spencers Majestic Foods is considering the replacement of some old equipment. The new equipment will cost $300,000 including delivery and installation. The old equipment to be replaced has a book value of $100,000 and can be sold pre-tax for $120,000. If the firm's effective tax rate is 40%, compute the net investment.

A)$192,000
B)$188,000
C)$180,000
D)$228,000

Question 28

Jose's Cantinas Incorporated plans to expand. This will require the acquisition of new equipment. The equipment will cost $85,000 including delivery and installation. Additional net working capital of $25,000 will be needed immediately. Land for the expansion cost Jose's $100,000 three years ago, but could be sold to net $200,000 after taxes today. Compute the net investment for this project.

A)$185,000
B)$310,000
C)$210,000
D)$285,000

Question 29

Tokyo Food Supplies Corporation is considering an expansion to a new market. Tokyo Food Supplies has already conducted and paid $35,000 for a marketing survey. The expansion will cost $400,000 for new assets, another $25,000 for shipping and delivery costs, and another $70,000 for installation costs. In addition, $150,000 in net working capital will be needed immediately. Compute the net investment.

A)$495,000
B)$680,000
C)$645,000
D)$550,000

Question 30

A firm is planning a project that will both expand the firm's operations and replace some of the older, less efficient assets of the firm. The new assets will cost the firm $200,000 plus an additional $5,000 for delivery and $25,000 for installation. Old assets being replaced have a book value of $50,000 and can be sold pre-tax for $40,000. The new project will require additional land. The land to be used was purchased three years ago for $75,000 but could be sold today for $140,000 net of taxes. The new project will require an increase of $20,000 in net working capital immediately. What is this project's net investment? Use 40% for the effective tax rate.

A)$350,000
B)$281,000
C)$390,000
D)$346,000