Which of the following best describe why cash flows are utilized rather than accounting profits when evaluating capital projects?
A) Deducting interest expense from income and also including it in the discount rate would result in double counting.
B) Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
C) Cash flows are more stable than accounting profits.
D) Both A and B.
Which of the following is the best example of an incremental cash inflow/outflow?
A) Cash flows that are achieved by diverting sales from other projects of the firm
B) Cash flows that are associated with the financing of a project
C) Cash flows that occur a little at a time
D) What the total cash flows will be to the company if the project is undertaken as opposed to what they would have been if the project had not been undertaken
Which of the following is an example of a sunk cost?
A) Overhead costs that are associated with a project
B) Interest expense associated with a project
C) Market study expenses incurred in order to decide if a firm should accept a project
D) Depreciation expenses associated with a project
Which of the following cash flows should be included as incremental costs when evaluating capital projects?
A) A new security system will reduce shoplifting losses by $50,000 per year.
B) New equipment associated with the project will increase depreciation expense by $300,000 per year.
C) Interest on construction loans will increase interest expense by $225,000 per year.
D) The new project will occupy about 5% of the Chief Operating Officer’s time, so 5% of her salary should be included.
Which of the following would be considered a termination cash flow?
A) The expected salvage value of the asset
B) Any tax payments or refunds associated with the salvage value of the asset
C) Recapture of any investment in working capital that was included as an incremental cash outlay
D) All of the above
How is interest expense that is associated with a project treated in the capital budgeting process?
A) It is treated as a cash outflow when estimating the incremental cash flows associated with a project.
B) It is built into the discount rate.
C) It is considered a synergistic incremental cash flow.
D) Interest expense is not relevant to any capital budgeting decisions.
