Principles Of Managerial Finance Brief 7th Edition By Gitman – Test Bank

Chapter 11 Capital Budgeting Cash Flows and Risk Refinements

11.1 Discuss relevant cash flows and the three major cash flow components.

1) Accounting figures and cash flows are not necessarily the same due to the presence of certain non-cash expenditures on a firm’s income statement.
Answer: TRUE
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Previous Edition
AACSB Tag: Analytic Skills

2) Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.
Answer: TRUE
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Previous Edition
AACSB Tag: Analytic Skills

3) The relevant cash flows for a proposed capital expenditure are the incremental after-tax cash outflows and resulting subsequent inflows.
Answer: TRUE
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Previous Edition
AACSB Tag: Reflective Thinking Skills

4) Incremental cash flows represent the additional cash flows expected as a direct result of the proposed project.
Answer: TRUE
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Previous Edition
AACSB Tag: Reflective Thinking Skills

5) The three major cash flow components include the initial investment, operating cash flows, and terminal cash flow.
Answer: TRUE
Diff: 1
Topic: Major Cash Flow Components
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Revised
AACSB Tag: Analytic Skills
6) The three major cash flow components include the initial investment, nonoperating cash flows, and terminal cash flow.
Answer: FALSE
Diff: 1
Topic: Major Cash Flow Components
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Revised
AACSB Tag: Analytic Skills

7) Initial cash outflows and subsequent operating cash inflows for a project are referred to as ________.
A) necessary cash flows
B) relevant cash flows
C) perpetual cash flows
D) ordinary cash flows
Answer: B
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Previous Edition
AACSB Tag: Analytic Skills

8) Relevant cash flows for a project are best described as ________.
A) incidental cash flows
B) incremental cash flows
C) sunk cash flows
D) contingent cash flows
Answer: B
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Revised
AACSB Tag: Analytic Skills

9) Should financing costs such as the returns paid to bondholders and stockholders be considered in computing after-tax operating cash flows? Why or why not?
Answer: Financing costs are not an incremental cash flow for capital budgeting purposes. Financing costs are a direct consequence of how the project is financed, not whether the project is economically viable. Financing costs are embedded in the required rate of return used to discount project cash flows.
Diff: 1
Topic: Relevant Cash Flows
Learning Obj.: LG 1
Learning Outcome: F-08
Question Status: Revised
AACSB Tag: Analytic Skills

11.2 Discuss expansion versus replacement decisions, sunk costs and opportunity costs.

1) If a new asset is being considered as a replacement for an old asset, the relevant cash flows would be found by adding the operating cash flows from the old asset to the operating cash flows from the new asset.
Answer: FALSE
Diff: 1
Topic: Expansion Versus Replacement Decisions
Learning Obj.: LG 2
Learning Outcome: F-08
Question Status: Revised
AACSB Tag: Analytic Skills