Question Details

Which of the following factors should be included in the cash flows 



1.	Which of the following factors should be included in the cash flows used to estimate a project- NPV?
a.	All costs associated with the project that have been incurred prior to the time the analysis is being conducted.
b.	Interest on funds borrowed to help finance the project.
c.	The end-of-project recovery of any working capital required to operate the project.
d.	Cannibalization effects, but only if those effects increase the project- projected cash flows.
e.	Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.

2.	When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:
a.	Changes in net working capital attributable to the project.
b.	Previous expenditures associated with a market test to determine the feasibility of the project, provided those costs have been expensed for tax purposes.
c.	The value of a building owned by the firm that will be used for this project.
d.	A decline in the sales of an existing product, provided that decline is directly attributable to this project.
e.	The salvage value of assets used for the project that will be recovered at the end of the project- life.

3.	Which of the following statements is CORRECT?
a.	An externality is a situation where a project would have an adverse effect on some other part of the firm- overall operations.  If the project would have a favorable effect on other operations, then this is not an externality.
b.	An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank- other offices to increase. 
c.	The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not.  This is another reason to favor the NPV.
d.	Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified.  However, the payback method does not.
e.	Identifying an externality can never lead to an increase in the calculated NPV.

4.	As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data.  What is the Year 1 cash flow?
Sales revenues	$13,000
Depreciation	$4,000
Other operating costs	$6,000
Tax rate	35.0%
a.	$5,950
b.	$6,099
c.	$6,251
d.	$6,407
e.	$6,568




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