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Exam 11: Cash Flows and Capital Budgeting

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Question 41

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Free cash flow: What is Champagne's free cash flow for 2008?

A) $2,050,000
B) $2,500,000
C) $3,250,000
D) $4,000,000

E) A) and C)
F) All of the above

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Question 42

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Opportunity costs should always be included in the cash flow calculations of a project.

A) True
B) False

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Question 43

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When to replace an asset: Burt's Pizzas is considering whether to purchase an oven. Burt's calculates that its current oven generates $4,000 of cash flow per year. A new oven would cost $15,000 and would provide cash flow of $6,000 per year for six years. What is the equivalent annual cash flow for the new oven (round to the nearest dollar) , and should Burt's purchase the new oven? Assume the cost of capital for Burt's is 12 percent.

Why is depreciation and amortization added back when calculating free cash flows generated by a project?

In order for a project to generate a positive net working capital cash flow at the conclusion of a project,

Free cash flow: What are Champagne's cash flows associated with investments for 2008?

If the salvage value, at the time of an asset disposition, is less than the book value of the asset, then the firm will effectively receive a positive cash flow from taxes on the sale.

Free cash flow: What is Provo's cash flow from operations for 2008?

Projects with different lives: Your firm is deciding whether to purchase a high-quality printer for your office or one of lesser quality. The high-quality printer costs $40,000 and should last four years. The lesser quality printer costs $30,000 and should last three years. If the cost of capital for the firm is 13 percent, then what is the equivalent annual cost for the best choice for the firm? Round to the nearest dollar.

Terminal-year free cash flows may differ from the cash flows provided in the typical year of a project for reasons such as the return/repayment of increases/reductions in additional working capital in the prior years.

The term incremental in the context of incremental after-tax free cash flows refers to the fact that the firm's total after-tax free cash flows will change if the new project is adopted.

When is the appropriate time to harvest an asset?

A progressive tax system means that a taxpayer will pay a higher tax rate for a given dollar of earnings for every successive year.

A tax system in which taxpayers pay a progressively larger share of their income in taxes as their income rises is called:

The expected cash flows for a project are fixed amounts that have zero variability in the projected values.

Additions to tangible assets, intangible assets ,and current assets can be described as:

Accounting earnings are a reliable measure of the costs and benefits of a project.

If you start with incremental net operating profits after tax (NOPAT) and add depreciation and amortization to it, then you will obtain incremental cash flow from operations.

Whenever a project has a negative impact on an existing project's cash flows, then that effect should:

The ___________ is intended to reconcile changes in the balance sheet cash accounts.