Making Capital Investment Decisions

File: Chapter 008 Making Capital Investment Decisions

1. The cash flows of a new project that come at the expense of a firm’s existing projects are called:

a. salvage value expenses.

b. net working capital expenses.

c. sunk costs.

d. opportunity costs.

e. erosion costs.

Answer: e

Difficulty level: Easy

Topic: EROSION COSTS

2. The cash flow from projects for a company is computed as the:

a. net operating cash flow generated by the project, less any sunk costs and erosion costs.

b. sum of the incremental operating cash flow and after-tax salvage value of the project.

c. net income generated by the project, plus the annual depreciation expense.

d. sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project.

e. sum of the sunk costs, opportunity costs, and erosion costs of the project.

Answer: d

Difficulty level: Medium

Topic: CASH FLOW

3.. Which one of the following is an example of an incremental cash flow?

a. the annual salary of the company president which is a contractual obligation

b. the rent on a warehouse which is currently being utilized

c. the rent on some new machinery that is required for an upcoming project

d. the property taxes on the currently owned warehouse which has been sitting idle but is going to be utilized for a new project

e. the insurance on a company-owned building which will be utilized for a new project

Answer: c

Difficulty level: Medium

Topic: INCREMENTAL CASH FLOW

4.. You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.

a. opportunity

b. fixed

c. incremental

d. sunk

e. relevant

Answer: d

Difficulty level: Easy

Topic: SUNK COST

5.. All of the following are anticipated effects of a proposed project. Which of these...