1.Free cash flows are what is left over for distribution to creditors and stockh

Question

1.Free cash flows are what is left over for distribution to creditors and stockholders after the firm has made the necessary investments in working capital and long-term assets. True or false

2.The impact of a project on another project's cash flows should be ignored.True or false

3.The expected cash flows for a project are fixed amounts that do not vary over the life of the project.True or false

4.Opportunity costs should be included in the cash flow calculations of a project.True or false

5.Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project?

revenues

sunk costs

depreciation

variable costs

6.Brown Mack, Inc., currently has two large manufacturing divisions that share a single plant. Brown Mack owns the plant but has calculated that $6 million of overhead expenses should be allocated to the two equal-sized divisions. If Brown Mack starts a third manufacturing division, of equal size to the other two divisions, then what overhead cost should the new division take into account on its capital budgeting cash flow analysis?

0

$2 million

$3 million

$6 million

7.The term ___________ refers to the fact that these cash flows reflect the amount by which the firm's total after-tax free cash flows will change if the project is adopted.

periodic

perpetuity

incremental

taxable

8.The cash flows used in capital budgeting calculations are based on

historical revenue.

forecasts of future cash revenues, cash expenses, and cash investment outlays.

forecasts of net income.

forecasts of retained earnings available for financing projects.

9.You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody6

periodic

perpetuity

incremental

taxable

Explanation / Answer

1.Free cash flows are what is left over for distribution to creditors and stockholders after the firm has made the necessary investments in working capital and long-term assets.

True

Note : Free Cash Flow = NOPAT + Depreciation - Change in Working Capital - Net capital Expenditure

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