Using Discounted Cash-flow Analysis To Make Investment Decisions

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Question 1

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Capital budgeting analysis focuses on cash flow as opposed to profits.

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Question 2

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Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

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Question 3

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Sunk costs influence capital budgeting decisions only when the sunk costs exceed future cash inflows.

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Question 4

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Opportunity costs are evaluated for investment decisions at their historical cost.

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Question 5

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The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

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Question 6

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In project analysis,allocations of overhead should be limited to those that represent additional expense.

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Question 7

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A reduction in working capital increases cash flows.

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Question 8

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An asset in the MACRS 5-year class life will have depreciation expense in 6 different years.

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Question 9

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The present value of the total depreciation tax shield will be higher when an asset uses MACRS than when depreciated straight-line.

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Question 10

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If a firm sells an asset for more than its value in the IRS's books,the resulting net cash flow will be less than the sales price.

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Question 11

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When a firm makes an investment in working capital,the cash is usually recovered later.

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Question 12

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Discounting real cash flows with real interest rates provides an overly optimistic idea of a project's value.

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Question 13

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Sunk costs remain the same whether or not you accept the project.

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Question 14

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Sunk costs do not affect the net present value of a project.

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Question 15

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Investments in working capital,just like investments in plant and equipment,result in cash inflows.

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Question 16

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A project will always generate extra overhead costs.

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Question 17

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Discounting real cash flows at a nominal rate is a serious mistake.

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Question 18

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Suppose you finance a project partly with debt.You should neither subtract the debt proceeds from the project's required investment,nor would you recognize the interest and principal payments on the debt as cash outflows.

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Question 19

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When you finance a project partly with debt,you should still view the project as if it were all equity-financed,treating all cash outflows required for the project as coming from stockholders,and all cash inflows as going to them.

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Question 20

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As a project comes to its end,there is a disinvestment in working capital,which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

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