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Sale of an asset for less than book value creates an operating loss which effectively reduces the company's taxes by an amount equal to ____ times the loss.
Sale of an asset for less than book value creates an operating loss which effectively reduces the company's taxes by an amount equal to ____ times the loss.
The value of resources used in an investment project should be measured in terms of their ____.
The value of resources used in an investment project should be measured in terms of their ____.
There is neither a gain or a loss on the sale of a depreciable asset for an amount exactly equal to its ____.
There is neither a gain or a loss on the sale of a depreciable asset for an amount exactly equal to its ____.
The ____ is a schedule of projects arranged in order according to their expected rates of return.
The ____ is a schedule of projects arranged in order according to their expected rates of return.
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Which of the following would not be classified as a capital expenditure for decision-making purposes?
Which of the following would not be classified as a capital expenditure for decision-making purposes?
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A firm's cost of capital is:
A firm's cost of capital is:
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The decision by the Municipal Transportation Authority to either refurbish existing buses, to buy new large buses, or to supplement the existing fleet with mini-buses is an example of:
The decision by the Municipal Transportation Authority to either refurbish existing buses, to buy new large buses, or to supplement the existing fleet with mini-buses is an example of:
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Which of the following is not a major difficulty in implementing the basic capital budgeting model?
Which of the following is not a major difficulty in implementing the basic capital budgeting model?
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Which of the following is not a major step in the capital budgeting process?
Which of the following is not a major step in the capital budgeting process?
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Which of the following is a basic principle when estimating a project's cash flows?
Which of the following is a basic principle when estimating a project's cash flows?
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Which of the following items is not considered as a part of the net investment calculation?
Which of the following items is not considered as a part of the net investment calculation?
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The effect of a one dollar increase in depreciation expenses is to ____ the typical firm's net cash flows by ____ one dollar.
The effect of a one dollar increase in depreciation expenses is to ____ the typical firm's net cash flows by ____ one dollar.
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The dollar amount of interest charges is:
The dollar amount of interest charges is:
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Raider Productions has to decide whether to build its warehouse in Dallas or Houston. This decision falls into the class of:
Raider Productions has to decide whether to build its warehouse in Dallas or Houston. This decision falls into the class of:
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The determination of net cash flows (NCF) should never include:
The determination of net cash flows (NCF) should never include:
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In estimating the net investment, an outlay that has already been made is known as a (n) ____.
In estimating the net investment, an outlay that has already been made is known as a (n) ____.
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Which of the following are (is) generally considered problems associated with cash flow estimation?
Which of the following are (is) generally considered problems associated with cash flow estimation?
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Most firms choose accelerated depreciation methods because
Most firms choose accelerated depreciation methods because
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Cash flows for all investment projects should be projected over the____ of the project
Cash flows for all investment projects should be projected over the____ of the project
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When a firm sells an asset for_____ , it realizes a capital gain and must pay income taxes on it.
When a firm sells an asset for_____ , it realizes a capital gain and must pay income taxes on it.
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In estimating the net investment, an outlay that has already been made is known as a_____
In estimating the net investment, an outlay that has already been made is known as a_____
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Depreciation is based on the asset cost plus all of the following except
Depreciation is based on the asset cost plus all of the following except
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Depreciation____ reported profits and it____ taxes paid by a firm.
Depreciation____ reported profits and it____ taxes paid by a firm.
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If a firm sells an asset for less than its book value,
If a firm sells an asset for less than its book value,
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The_____ the amount of depreciation charged in a period, the____ will be the firm’s taxable income.
The_____ the amount of depreciation charged in a period, the____ will be the firm’s taxable income.
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In terms of the capital budgeting process, net cash flows are
In terms of the capital budgeting process, net cash flows are
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A recent survey of Fortune 500 firms regarding their cash flow estimation procedures indicated that
A recent survey of Fortune 500 firms regarding their cash flow estimation procedures indicated that
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Depreciation
Depreciation
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The capital budgeting process is very important to the firm because it:
The capital budgeting process is very important to the firm because it:
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A____ is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year.
A____ is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year.
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The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.
The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.
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A____project is one whose acceptance is dependent on the adoption of one or more other projects.
A____project is one whose acceptance is dependent on the adoption of one or more other projects.
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The net cash flows for any year during the life of capital expenditure project are equal to the change in plus the change in _____.
The net cash flows for any year during the life of capital expenditure project are equal to the change in plus the change in _____.
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The net investment calculation for an____project normally includes____.
The net investment calculation for an____project normally includes____.
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There is a capital gain on the sale of an asset for ____.
There is a capital gain on the sale of an asset for ____.
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The net investment calculation for an asset replacement decision normally includes any___ .
The net investment calculation for an asset replacement decision normally includes any___ .
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When calculating the net cash flow in a project’s expected final year,
When calculating the net cash flow in a project’s expected final year,
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When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are____.
When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are____.
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Capital expenditure projects may be classified in all the following types except:
Capital expenditure projects may be classified in all the following types except:
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_____have cash flow patterns with more than one sign change.
_____have cash flow patterns with more than one sign change.
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The difference between a capital expenditure and an operating expenditure is that a capital expenditure:
The difference between a capital expenditure and an operating expenditure is that a capital expenditure:
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Of the following, an example of a component of a firm’s cost of capital is:
Of the following, an example of a component of a firm’s cost of capital is:
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A contractor has a team of plumbers and assigns those plumbers to a new construction site. The fact that the
plumbers are unavailable for any other job makes the construction site project a/an:
A contractor has a team of plumbers and assigns those plumbers to a new construction site. The fact that the plumbers are unavailable for any other job makes the construction site project a/an:
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A term meaning that the firm has limited funds and must choose only those projects that will be profitable is
A term meaning that the firm has limited funds and must choose only those projects that will be profitable is
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Study Notes
Capital Budgeting and Cash Flow Analysis
- Sale of an asset below book value: Creates an operating loss, reducing company taxes by ½ the loss multiplied by one minus the marginal tax rate.
- Resource valuation in investment projects: Measured by opportunity cost, not historical cost or acquisition cost.
- Depreciable asset sale with exact book value: Results in neither a gain nor a loss.
- Investment opportunity curve: A schedule of projects ordered by their expected rates of return. It is a descending curve.
- Capital expenditure vs. operating expenditure: Capital expenditures are for long-term assets, while operating expenses are for day-to-day operations. For example, buying a building is a capital expenditure, while paying rent is an operating expense. A training program is a capital expenditure, and buying Treasury bills is an operating expenditure.
Additional Analysis Items
- Cost of Capital: A critical financial ratio used in the capital budgeting process.
- Independent vs. Mutually Exclusive Projects: Decisions about independent projects do not affect the choice of others; mutually exclusive projects, on the other hand, must be considered as alternatives.
- Capital Budgeting Process Steps: Generating proposals, estimating cash flows, analyzing alternatives, and post-audit.
- Net Investment Calculation: Excludes the first year's net cash flow, and includes increases in net working capital, salvage value, or installation & shipping charges.
- Depreciation Effect on Cash Flows: One dollar increase in depreciation reduces net cash flows by one dollar, but is a non-cash flow item.
- Interest Charges in Net Cash Flow Estimation: Interest charges are normally not included in the net cash flow calculation.
- Alternative Investment Decisions: A firm faces a choice between different investment projects if the projects are mutually exclusive and the firm lacks the resources to undertake every profitable project.
- Net Investment Calculation Details: For asset replacement decisions, it normally includes the after-tax salvage value of the old asset. If cash flows from the old asset can be increased, then the after-tax salvage value of the old asset and any increase in working capital are considered.
- Net Cash Flow Calculation: Net cash flow is the difference between a project's cash inflows and cash outflows during a specific period. Cash inflows are the project's revenues, while cash outflows are the expenses associated with the project.
- Sunk Costs: Already incurred costs that should not be considered when evaluating a project.
- Capital Rationing: A constraint on the funds available for capital budgeting, forcing firms to prioritize projects.
- Contingent Projects: A project that is contingent on the adoption of one or more other projects.
- Mutually Exclusive Projects: Projects in which selecting one prevents the selection of another.
- Non-conventional Projects: Projects with multiple sign changes in their cash flow stream.
- Conventional Projects: Projects with a single sign change in their cash flow stream.
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Description
Test your understanding of capital budgeting concepts and cash flow analysis with this quiz. Explore key items like sale of assets, resource valuation, and the difference between capital and operating expenditures. Assess your knowledge on the implications of financial decisions on taxes and investment opportunities.
