Total cash flow from a project is defined as:

A.Earnings before interest and taxes minus taxes plus depreciation.

B.Earnings before interest and taxes plus taxes minus depreciation.

C.Operating cash flow minus the change in net working capital plus capital spending.

D.Operating cash flow minus capital spending minus the change in net working capital.

12.The depreciation tax shield is defined as:

A.[(Sales - costs)(1 - Tc)][(depreciation)(Tc)].

B.(Depreciation)(Tc).

C.Net income + depreciation - taxes.

D.(Depreciation)(1 - Tc).

13.The reduction in the sale of hamburgers when hot dogs are added to a menu is called the _____ cost.

A.Sunk

B.Opportunity

C.Incremental

D.Erosion

14.Your company is considering two different methods of producing its product: purchase production equipment, or contract with a supplier to build the product for them. The methods have differing lives and cash flow streams. You should:

A.Choose the method that will least affect the statement of financial position of the company.

B.Choose the method that maximizes future cash inflows.

C.Choose the method that will result in the highest net income.

D.Choose the method that maximizes firm value.

15.It is important to identify and use only incremental cash flows in capital investment decisions:

A.Because they are the simplest to identify.

B.Because ultimately it is the change in a firm's overall future cash flows that matter.

C.To accommodate unforeseen changes that might occur.

D.Whenever sunk costs are involved.

16.When we employ ________________ we are evaluating a projecton the basis ofits incremental cash flows, thereby ignoring the other cash flows of the firm.

A.the equivalence theorem

B.the law of one price

C.Bell's theorem

D.the stand-alone principle

17.Which of the following is true regarding project evaluation?

A.The stand-alone principle calls for evaluation of a project based on its incremental cash flows.

B.Changes in NWC are not considered incremental cash flows.

C.When fixed assets are sold at the project end, there are usually no tax consequences of the sale.

D.Whether straight-line depreciation or CCA is used will have no impact on project NPV.

18.Your company currently sells oversized golf clubs. The Board of Directors wants you to look at replacing them with a line of supersized clubs. Which of the following is NOT relevant?

A.A reduction in revenues of $300,000 from terminating the oversized line of clubs.

B.$200,000 spent on research and development last year on oversized clubs.

C.$350,000 you will pay to Fred Singles to promote your new clubs.

D.$125,000 you will receive by selling the existing production equipment which must be upgraded if you produce the new supersized clubs.

19.Which of the following is NOT considered a relevant, incremental cash flow in capital budgeting analysis?

A.Opportunity costs

B.Erosion costs

C.Sunk costs

D.Fixed asset salvage values

20.Which of the following describe(s) relevant cash flows for the purpose of performing capital budgeting analysis?

I. Cash flows must be incremental

II. Cash flows must be after-tax

III. NI + D

IV. Additions to net working capital

A.I and III only

B.I, II, and III only

C.I and IV only

D.I, II, III, and IV

21.The Government has been trying to decidewhether or notto purchase any of the new, advanced icebreakers it has developed. One of the arguments infavourof purchasing the ships is that since so much money has been spent on their development it would be a waste of money not to buy them now. What is the major problem with this argument?

A.It includes sunk costs in the decision-making process.

B.It includes opportunity costs in the decision-making process.

C.It includes net working capital changes in the decision-making process.

D.It includes financing costs in the decision-making process.

22.When you set the project NPV equal to zero in calculating a bid price you are:

A.Going to earn zero net income on the project.

B.Appropriately including opportunity costs in your analysis.

C.Certain to be the low bidder since, if any firm does bid lower, they will be bidding based on a negative NPV project.

D.Finding the price at which you expect to create zero wealth for your shareholders.

23.In setting the bid price, the firm seeks the price that will cause the project to "breakeven" in a financial sense. The lowest acceptable bid price results inall ofthe following EXCEPT:

A.NPV = 0

B.Discounted payback = the life of the project

C.IRR = required return

D.AAR = required return

24.Which of the following is true?

I. Setting the bid price requires finding the point at which project NPV is zero.

II. In a cost-cutting proposal the reduction in costs has the same effect as an increase in sales.

III. EAC is used to evaluate mutually exclusive projects with different lives if the projects are expected to be continuously replicated.

A.III only

B.I and II only

C.I and III only

D.I, II, and III

25.Billie Jo sent a letter inquiring about the cost of a piece of equipment for a project she is considering. The cost of the stamp to mail this letter is an example of a(n) _____ cost.

A.Opportunity

B.Relevant

C.Sunk

D.Incremental

26.Big Land Development Co. purchased a tract of land last year for $1.2 million. At that time, the company spent $50,000 in legal fees to have the land rezoned for commercial use and another $175,000 to have the land graded so that it is usable. The company is now trying to decide if they want to build one large retail store on the property or a strip mall consisting of smaller stores. Which of the costs identified above should be included in the project analysis to determine the best use of the property?

A.All ofthe identified costs

B.Only the cost of the land and the grading

C.Only the legal fees and the grading costs

D.None of the identified costs