Question Details

Which of the following is NOT a relevant cash flow 


1.	Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker's books.  The lost sales on the older book are a sunk cost and as such should not be considered in the analysis for the new book.

a.	True
b.	False
2.	Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? 

a.	Changes in net working capital.
b.	Shipping and installation costs.
c.	Cannibalization effects.
d.	Opportunity costs.
e.	Sunk costs that have been expensed for tax purposes.

3.	Which of the following statements is CORRECT?
a.	A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
b.	A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
c.	A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
d.	Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV.
e.	A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm- existing stores.

4.	Which of the following statements is CORRECT?
a.	Using accelerated depreciation rather than straight line would normally have no effect on a project- total projected cash flows but it would affect the timing of the cash flows and thus the NPV.
b.	Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
c.	Corporations must use the same depreciation method (e.g., straight line or accelerated) for stockholder reporting and tax purposes.
d.	Since depreciation is not a cash expense, it has no effect on cash flows and thus no effect on capital budgeting decisions.
e.	Under accelerated depreciation, higher depreciation charges occur in the early years, and this reduces the early cash flows and thus lowers a project's projected NPV.




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