Question

choose the correct answer :

1. All of the following Influence capital budgeting cash flows EXCEPT:

_     accelerated depreciation

_    salvage value

_     tax rate changes

_    method of project financing used

2. In proper capital budgeting analysis we evaluate incremental

_  accounting income

_cash flow

_earnings

_     operating profit

3. The estimated benefits from a project are expressed as cash flows instead of income flows because:

_     it is simpler to calculate cash flows than income flows

_     it is cash, not accounting income, that is central to the firm's capital budgeting decision

_    this is required by the Internal Revenue Service

_     this is required by the Securities and Exchange Commission

4. ln estimating nafter-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT:

--- sunk costs

_    opportunity cost

_    changes In working capital resulting from the project, net of spontaneous changes in C/L effects of inflation

5. A capital investment is one that

_     hasthe prospect of Jong term benefits

_     has the prospect of short term benefits

_     is only undertaken by large corporatiOns

_     applies only to investment in fixed assets

Answer 1

As per rules I am answering the first 4 subparts of the question

1: method of project financing used

(Capital budgeting is concerned with cash flows . Higher depreciation results in faster tax saving. Salvage value Is a cash inflow. Tax rate changes impact cash flows. However, method of financing does not impact the cash flows, but the WACC)

2: cash flow

(Capital budgeting is concerned with cash flows only as its gives least scope for manipulation and window dressing. Accounting income,earnings and operating profits impact cash flows indirectly)

3: it is cash, not accounting income, that is central to the firm's capital budgeting decision.

(Capital budgeting is concerned with cash flows only as its gives least scope for manipulation and window dressing. Other options are irrelevant)

4: Sunk costs

These are costs incurred already and are irrelevant to decision making. Hence they are disregarded in capital budgeting. Other options are relevant since they impact cash flows.