The owner of a convenience store is considering adding a take-out sandwich section to her offerings. The new activity will occupy 25% of the space and account for 30% of total revenues. Property insurance on the building is $9,000 per year and will not change because of the new activity. How much of the insurance premium should be allocated to the new product line?
A) $2,700
B) $2,475
C) $2,250
D) $0.00
Mr. Smith included the cost of test marketing before production in the calculation of the initial outlay. Apparently, Mr. Smith does not understand the concept of
A) side-effect costs.
B) opportunity costs.
C) sunk costs.
D) variable costs.
Sunk costs are a type of incremental cash flow that should be included in all capital-budgeting decisions.
Answer: FALSE
When determining how much overhead cost to include in incremental cash flows for a capital budgeting decision, the allocation of overhead by the accounting department based on percentage of space used by a project should always be used.
Answer: FALSE
The pertinent issue for determining whether overhead costs should be part of a project's relevant after-tax cash flow is whether the project benefits from the overhead items.
Answer: FALSE
The initial outlay involves the immediate cash outflow necessary to purchase the asset and put it in operating order.
Answer: TRUE
When replacing an existing asset, the cash inflow associated with the sale of the old asset and any related tax effects must be considered and accounted for in the analysis.
Answer: TRUE
The initial outlay of an asset does not include installation costs.
Answer: FALSE
In making a capital budgeting decision we only include the incremental cash flows resulting from the investment decision.
Answer: TRUE
To be conservative, capital budgeting analysis assumes that projects cannot add sales to existing lines of business.
Answer: FALSE
A company converts space to use as a manufacturing facility. Previously it was rented to another company as a warehouse. This is an example of a sunk cost.
Answer: FALSE
In measuring cash flows we are interested only in the incremental or differential after-tax cash flows that are attributed to the investment proposal being evaluated.
Answer: TRUE
