1. To accurately reflect the costs associated with a project, the analyst should exclude interest expenses in the computation of operating cash flows.

2. Assume that over the life of project X, net working capital is maintained at an amount equal to the initial investment. If so, net working capital doesn't need to be included in the NPV computation, since the outflow at time zero is exactly (as we generally assume) offset by an equal inflow at the end of the project's life.

3. Assume project X requires additions to net working capital in each year of its life, all to be recovered at the end. In this case, the present value of the net working capital recovery will exceed the total dollar outlays on net working capital.

4. A decrease in the corporate tax rate decreases the value of the depreciation tax shield, all else equal.

5. The changes in the firm's future cash flows that are a direct consequence of accepting a project are called:

A) Incremental cash flows.
B) Stand-alone cash flows.
C) Aftertax cash flows.
D) Net present value cash flows.
E) Erosion cash flows.

6. The evaluation of a project based solely on its incremental cash flows is the basis of the:
A) Incremental cash flow method.
B) Stand-alone principle.
C) Dividend growth model.
D) Aftertax salvage value analysis.
E) Discounted payback method.

7. A cost that has already been paid, or the liability to pay has already been incurred, is a(n):
A) Salvage value expense.
B) Net working capital expense.
C) Sunk cost.
D) Opportunity cost.
E) Erosion cost.

8. The most valuable investment given up if an alternative investment is chosen is a(n):
A) Salvage value expense.
B) Net working capital expense.
C) Sunk cost.
D) Opportunity cost.
E) Erosion cost.

9. The cash flows of a new project that come at the expense of a firm's existing projects are:
A) Salvage value expenses.
B) Net working capital expenses.
C) Sunk costs.
D) Opportunity costs.
E) Erosion costs.

10. A pro forma financial statement is one that __________________________.
A) projects future years' operations
B) is expressed as a percentage of the total assets of the firm
C) is expressed as a percentage of the total sales of the firm
D) is expressed relative to a chosen base year's financial statement
E) reflects the past and current operations of the firm

11. The cash flow from projects for a company is:
A) The net operating cash flow generated by the project, less any sunk costs and erosion costs.
B) The sum of the incremental operating cash flow and aftertax salvage value of the project.
C) The bottomline net income generated by the project, plus the annual depreciation expense.
D) The sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project.
E) The sum of the sunk costs, opportunity costs, and erosion costs of the project.

12. The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called (the) _______________________.
A) aftertax depreciation savings
B) depreciable basis
C) depreciation tax shield
D) operating cash flow
E) aftertax salvage value

13. The annual annuity stream of payments with the same present value as a project's costs is called the project's:
A) Incremental cost.
B) Sunk cost.
C) Opportunity cost.
D) Erosion cost.
E) Equivalent annual cost.

Ans: E Level: Basic Subject: Equivalent Annual Cost Type: Definitions

14. Incremental cash flows are defined as:

A) The total cash flows of a firm from the point at which a project is implemented until the point at which the project ends.

B) Any change in the future net income of a firm that results from a new project being implemented.

C) The cash flows that are foregone when a new project or activity is accepted.

D) Those cash flows that have already occurred and will not change whether or not a new project is accepted.

E) The changes in the firm's future cash flows that are a direct consequence of accepting a project.

15. Sunk costs can be defined as:

A) The costs that have already been incurred and will not change whether or not a project is accepted.

B) The initial, or start-up, costs of a project that cannot be recouped should the new project be implemented.

C) Any and all fixed costs that are incurred as the result of accepting a new project or activity.

D) The costs resulting from losses in current projects due to the implementation of a new project.

E) Any and all costs necessary to implement a new project or activity.