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CHAPTER10

CHAPTER8

MakingCapitalInvestmentDecisions

I. DEFINITIONS

INCREMENTALCASHFLOWS

a 1. Thechangesinafirm’sfuturecashflowsthatareadirectconsequenceofacceptingaprojectarecalled_____cashflows.

a. incremental

b. stand-alone

c. after-tax

d. netpresentvalue

e. erosion

Difficultylevel:Easy

EQUIVALENTANNUALCOST

e 2. Theannualannuitystreamofpaymentswiththesamepresentvalueasaproject’scostsiscalledtheproject’s_____cost.

a. incremental

b. sunk

c. opportunity

d. erosion

e. equivalentannual

Difficultylevel:Easy

SUNKCOSTS

c 3. Acostthathasalreadybeenpaid,ortheliabilitytopayhasalreadybeenincurred,isa(n):

a. salvagevalueexpense.

b. networkingcapitalexpense.

c. sunkcost.

d. opportunitycost.

e. erosioncost.

Difficultylevel:Easy

OPPORTUNITYCOSTS

d 4. Themostvaluableinvestmentgivenupifanalternativeinvestmentischosenisa(n):

a. salvagevalueexpense.

b. networkingcapitalexpense.

c. sunkcost.

d. opportunitycost.

e. erosioncost.

Difficultylevel:Easy

EROSIONCOSTS

e 5. Thecashflowsofanewprojectthatcomeattheexpenseofafirm’sexistingprojectsarecalled:

a. salvagevalueexpenses.

b. networkingcapitalexpenses.

c. sunkcosts.

d. opportunitycosts.

e. erosioncosts.

Difficultylevel:Easy

PROFORMAFINANCIALSTATEMENTS

a 6. Aproformafinancialstatementisonethat:

a. projectsfutureyears’operations.

b. isexpressedasapercentageofthetotalassetsofthefirm.

c. isexpressedasapercentageofthetotalsalesofthefirm.

d. isexpressedrelativetoachosenbaseyear’sfinancialstatement.

e. reflectsthepastandcurrentoperationsofthefirm.

Difficultylevel:Easy

MACRSDEPRECIATION

b 7. ThedepreciationmethodcurrentlyallowedunderUStaxlawgoverningtheacceleratedwrite-offofpropertyundervariouslifetimeclassificationsiscalled_____depreciation.

a. FIFO

b. MACRS

c. straight-line

d. sum-of-year