Chapter 06
1.The changes in a firm's future cash flows that are a direct consequence of accepting a project are
called _____ cash flows.
A. i ncremental
B. s tand-alone
C. o pportunity
D. n et present value
E. e rosion
2.The annual annuity stream of payments with the same present value as a project's costs is called
the project's _____ cost.
A. i ncremental
B. s unk
C. o pportunity
D. e rosion
E. e quivalent annual
3.  A cost that has already been paid, or the liability to pay has already been incurred, is a(n):
A. s alvage value expense.
B. n et working capital expense.
C. s unk cost.
D. o pportunity cost.
E. e rosion cost.
4.The most valuable investment given up if an alternative investment is chosen is a(n):
A. s alvage value expense.
B. n et working capital expense.
C. s unk cost.
D. o pportunity cost.
E. e rosion cost.
5.  A decrease in a firm’s current cash flows resulting from the implementation of a new project is
referred to as:
A. s alvage value expenses.
B. n et working capital expenses.
C. s unk costs.
D. o pportunity costs.
deductible
E. e rosion costs.
6.The depreciation method currently allowed under U.S. tax law governing the accelerated write-off
of property under various lifetime classifications is called _____ depreciation.
A. F IFO
B. M ACRS
C. s traight-line
D. s um-of-years digits
E. c urvilinear
7.The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is
called the:
A. a ftertax depreciation savings.
B. d epreciable basis.
C. d epreciation tax shield.
D. o perating cash flow.
E. a ftertax salvage value.
8.The cash flow from a project is computed as the:
A. n et operating cash flow generated by the project, less any sunk costs and erosion costs.
B. s um of the incremental operating cash flow and aftertax salvage value of the project.
C. n et income generated by the project, plus the annual depreciation expense.
D. s um of the incremental operating cash flow, capital spending, and net working capital cash
flows incurred by the project.
E. s um of the sunk costs, opportunity costs, and erosion costs of the project.
9.Interest rates or rates of return on investments that have been adjusted for the effects of inflation
are called _____ rates.
A. r eal
B. n ominal
C. e ffective
D. s tripped
E. c oupon
10.The increase you realize in buying power as a result of owning an investment is referred to as the
_____ rate of return.
A. i nflated
B. r ealized
C. n ominal
D. r eal
E. r isk-free
11.The pro forma income statement for a cost reduction project:
A. w ill reflect a reduction in the sales of the firm.
B. w ill generally reflect no incremental sales.
C. h as to be prepared reflecting the total sales and expenses of the entire firm.
D. c annot be prepared due to the lack of any project related sales.
E. w ill always reflect a negative project operating cash flow.
12.One purpose of identifying all of the incremental cash flows related to a proposed project is to:
A. i solate the total sunk costs so they can be evaluated to determine if the project will add value
to the firm.
B. e liminate any cost which has previously been incurred so that it can be omitted from the
analysis of the project.
C. m ake each project appear as profitable as possible for the firm.
D. i nclude both the proposed and the current operations of a firm in the analysis of the project.
E. i dentify any and all changes in the cash flows of the firm for the past year so they can be
included in the analysis.
13.Sunk costs include any cost that:
A. w ill change if a project is undertaken.
B. w ill be incurred if a project is accepted.
C. h as previously been incurred and cannot be changed.
D. w ill be paid to a third party and cannot be refunded for any reason whatsoever.
E. w ill occur if a project is accepted and once incurred, cannot be recouped.
14.You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and
you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.
A. o pportunity
B. f ixed
C. i ncremental
D. s unk
E. r elevant
15.Erosion can be explained as the:
A. a dditional income generated from the sales of a newly added product.
B. l oss of current sales due to a new project being implemented.
C. l oss of revenue due to employee theft.
D. l oss of revenue due to customer theft.
E. l oss of cash due to the expenses required to fix a parking lot after a heavy rain storm.