Exam 12: Cash Flow Estimation and Risk Analysis

A) $12,332
B) $16,335
C) $16,015
D) $14,093
E) $13,132

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A) If an asset is sold for less than its book value at the end of a project's life,it will generate a loss for the firm,hence its terminal cash flow will be negative.
B) Only incremental cash flows are relevant in project analysis,the proper incremental cash flows are the reported accounting profits,and thus reported accounting income should be used as the basis for investor and managerial decisions.
C) It is unrealistic to believe that any increases in net operating working capital required at the start of an expansion project can be recovered at the project's completion.Operating working capital like inventory is almost always used up in operations.Thus,cash flows associated with operating working capital should be included only at the start of a project's life.
D) If equipment is expected to be sold for more than its book value at the end of a project's life,this will result in a profit.In this case,despite taxes on the profit,the end-of-project cash flow will be greater than if the asset had been sold at book value,other things held constant.
E) Changes in net operating working capital refer to changes in current assets and current liabilities,not to changes in long-term assets and liabilities,hence they should not be considered in a capital budgeting analysis.

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A) The company will produce the new product in a vacant building that was used to produce another product until last year.The building could be sold,leased to another company,or used in the future to produce another of the firm's products.
B) The project will utilize some equipment the company currently owns but is not now using.A used equipment dealer has offered to buy the equipment.
C) The company has spent and expensed for tax purposes $3 million on research related to the new product.These funds cannot be recovered,but the research may benefit other projects that might be proposed in the future.
D) The new product will cut into sales of some of the firm's other products.
E) If the project is accepted,the company must invest an additional $2 million in net operating working capital.However,all of these funds will be recovered at the end of the project's life.

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A) $8,468
B) $5,986
C) $6,424
D) $7,300
E) $7,884

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A) A firm has a parcel of land that can be used for a new plant site or be sold,rented,or used for agricultural purposes.
B) A new product will generate new sales,but some of those new sales will be from customers who switch from one of the firm's current products.
C) A firm must obtain new equipment for the project,and $1 million is required for shipping and installing the new machinery.
D) A firm has spent $2 million on research and development associated with a new product.These costs have been expensed for tax purposes,and they cannot be recovered regardless of whether the new project is accepted or rejected.
E) A firm can produce a new product,and the existence of that product will stimulate sales of some of the firm's other products.

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A) The new project is expected to reduce sales of one of the company's existing products by 5%.
B) Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project,a portion of her salary for that year should be charged to the project's initial cost.
C) The company has spent and expensed $1 million on research and development costs associated with the new project.
D) The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project.
E) The firm would borrow all the money used to finance the new project,and the interest on this debt would be $1.5 million per year.

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A) Using accelerated depreciation rather than straight line would normally have no effect on a project's total projected cash flows but it would affect the timing of the cash flows and thus the NPV.
B) Under current laws and regulations,corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
C) Corporations must use the same depreciation method (e.g. ,straight line or accelerated) for stockholder reporting and tax purposes.
D) Since depreciation is not a cash expense,it has no effect on cash flows and thus no effect on capital budgeting decisions.
E) Under accelerated depreciation,higher depreciation charges occur in the early years,and this reduces the early cash flows and thus lowers a project's projected NPV.

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A) Since depreciation is not a cash expense,and since cash flows and not accounting income are the relevant input,depreciation plays no role in capital budgeting.
B) Under current laws and regulations,corporations must use straight-line depreciation for all assets whose lives are 3 years or longer.
C) If they use accelerated depreciation,firms will write off assets slower than they would under straight-line depreciation,and as a result projects' forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.
D) If they use accelerated depreciation,firms can write off assets faster than they could under straight-line depreciation,and as a result projects' forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.
E) If they use accelerated depreciation,firms can write off assets faster than they could under straight-line depreciation,and as a result projects' forecasted NPVs are normally higher than they would be if straight-line depreciation were required for tax purposes.

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A) Since depreciation is a cash expense,the faster an asset is depreciated,the lower the projected NPV from investing in the asset.
B) Under current laws and regulations,corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
C) Corporations must use the same depreciation method for both stockholder reporting and tax purposes.
D) Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project's forecasted NPV.
E) Using accelerated depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project's forecasted NPV.

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