1 Incremental cash flows from a project = A Firm cash flows with the project plu
ID: 2680905 • Letter: 1
Question
1 Incremental cash flows from a project =A Firm cash flows with the project plus firm cash flows without the project.
B Firm cash flows without the project plus or minus changes in revenue with the project.
C Firm cash flows with the project minus firm cash flows without the project.
D Firm cash flows without the project plus or minus changes in net income.
2 Relevant incremental cash flows include:
A incremental sales brought to the firm as a whole.
B sales captured from the firm's competitors.
C retained sales that would have been lost to new competing products.
D all of the above.
3 Which of the following would be considered a termination cash flow?
A Any tax payments or refunds associated with the salvage value of the asset
B Recapture of any investment in working capital that was included as an incremental cash outlay
C The expected salvage value of the asset
D All of the above
4 Diamond Inc. has estimated that a new building will cost $2,500,000 to construct. Land was purchased a year ago for $500,000 and could be sold today for $550,000. An environmental impact study required by the state was performed at a cost of $48,000. For capital budgeting purposes, what is the relevant cost of the new building?
A $3,050,000
B $3,048,000
C $2,500,000
D $3,098,000
5 If depreciation expense is taken over 5 years rather than 3 years, all things equal,
A depreciation has no effect on net present value.
B net present value will go down.
C net present value will go up.
D the answer depends on the company's marginal tax rate.
6 Greenspan Inc. 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?
A Discount cash flows at 10%; increase revenues and expenses by 3% each year.
B Discount cash flows at 13%; increase revenues and expenses by 3% each year.
C Discount cash flows at 7%; ignore inflation when forecasting revenues and expenses. (laoshishuode)
D Either A or C would be acceptable.
Explanation / Answer
1. C Firm cash flows with the project minus firm cash flows without the project. 2)D all of the above. 3)D All of the above 4)B $3,048,000 5)B net present value will go down. 6)A Discount cash flows at 10%; increase revenues and expenses by 3% each year.
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