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Flashcards in Chapter 14 MC Deck (12)
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1

when making capital expenditure decisions, firms should not consider which of the following
a. after-tax incremental cash flows
b. sunk cost
c. associated interest and dividend payments
d. externalities

a. cash flow estimation does not include sunk costs, associated interest and dividend payments or externalities

2

when making capital expenditure decisions, firms should not consider which of the following
a. change of working capital
b. opportunity cost
c. all project interdependencies
d. intangible considerations whose impact on cash flows cannot be estimated

d
when making capital budgeting decisions, firms should not consider intangible considerations unless their impact on cash flows can be estimated

3

what is the initial after-tax cash flow (CF0) of a project given the following information:
initial cost: $400,050
R&D costs associated with project : $10,000
associated opportunity costs: $90,000
decrease in inventory: $15,000
installation costs: $5,000

CF0 = C0 + change in net working capital + opportunity cost

400,050 - 15,000 + 90,000 + 5,000 = $480,050

Note that inventory decreased instead of increased as a result of the project

4

which of the following items is not included in the calculation of the ending (or terminal) cash flow (ECFn)?
a. salvage value
b. change in inventory levels
c. change in accounts receiveable levels
d. operating cash flows

d.
all of the others items except for operating cash flow are included in the calculation of the ending or (terminal)_ cash flow (ECFn)

5

a firm has a project that is expected to generate
annual revenue of $50,000
while incurring an annual cost of $18,000
the CCA is $45,000 and the
tax rate is 40%.

what is the after tax cash flow

CF2 = CFBT2 (1-T) + CCA2(T)
= (50,000 - 18,000) (1-0.40) + (45,000)(0.40)
= 19,300 + 18,000 = 37,200

6

A firm's discount rate is 20%
suppose annual revenue starts at $50,000
annual expenses start at 18,000
and both will grow at a rate of 6% from year 2 to year 15
what is the PV of operating cash flows for all 15 years?

PV (operating CFs) =( CFBT1 (1-T)/ K-g) - (CFBT16 (1-T)/ K-g) x 1/ (1 + K)exp 15

$115,810

7

Which of the following will not decrease the present value of the CCA tax shield associated with an investment project?
a. an increase in the discount rate
b. a decrease in the corporate tax rate
c. a decrease in the CCA rate
d. a decrease in the discount rate

d
a decrease in the corporate tax rate and /or a decrease in the CCA rate will decrease the present value of the CCA tax shield, while a decrease in the discount rate will increase it.
Personal income tax rate is irrelevant here

8

which of the following is false
a. CCA recapture occurs when the salvage value is greater than the ending UCC for the asset or asset class
b. Capital gains occur when the salvage value is greater than the original cost of the asset
c. CCA recapture is taxable
d. a terminal loss occurs when the salvage value is greater than the ending UCC for the asset or asset class

d
a terminal loss occurs when the salvage value is LESS
than the ENDING UCC for the asset/asset class

9

what is the terminal cash flow (ECFn) based on the following information?
the release of additional inventory tied up = $2,000
salvage value = 10,000
UCC = 20,000
initial cost (Co) = 35,000
T = 40%
assume the asset class will remain open

ECFn = SVn + change in NWCn
= 10,000 + 2,000 = 12, 000

10

which of the following statements is true about sensitivity analysis and scenario analysis

a. sensitivity analysis examines the impact of the change of one input at a time
b. scenario analysis examines the impact of the change of one input at a time
c. sensitivity analysis examines PV changes in response to differing scenarios
d. sensitivity analysis usually includes a base-case scenario, a best-case scenario, and a worst-case scenario

a
sensitivity analysis examines the impact of the change of one input at a time, but scenario analysis examines the impact of the change of multiple inputs at a time.

11

Oak inc, is planning to purchase a new, faster printers to replace its exisiting printers.
capital cost of new perinters = $300,000
current market price of the old printers = $50,000
CCA rate = 20%
tax rate = 40%
K = 20%
it is estimated that the new printers could last for 15 years. what is the second year incremental CCA expense

C0 new - CO old = 300,000 - 50,000 =$250,000
CCA1 = d x (1/2) change C0
= .20 x (1/2) (250,000)
= 225,000
CCA2 = 225,000 x .20 = 45,000

12

which of the following is true about replacement decisions
a. incremental cash flow is used
b. only the cash flow generated from the new machine is considered
c. the cash flow that would be generated from the old machine is irrelevant
d. the salvage value of the new machine is irrelevant

A
we use incremental cash flow ie. the difference between the cash flow generated form the new machine and the cash flow that would be generated form the old machine