Accounting Test Bank

The guiding rule in deciding if a free cash flow is incremental is to look at the company with, 3) versus without, the new project. Accounting profits are used to make capital budgeting decisions because generally accepted 1) accounting principles ensure that profits are the best measure of a company's economic activity. Answer: True False 2) Capital budgeting decisions are based on free cash flow because free cash flow better reflects when 2) money is received and available for reinvestment than account profits. Answer: True False 3) The guiding rule in deciding if a free cash flow is incremental is to look at the company with, 3) versus without, the new project. Answer: True False 4) A grocery store decides to offer beer for sale and this decision results in more potato chip sales. This 4) is an example of a synergistic effect. Answer: True False 5) Additional investment in working capital, even if it may be recovered at the end of a project, must 5) be included in capital budgeting analysis because of the time value of money. Answer: True False 6) Sunk costs are cash outflows that will occur regardless of the current accept/reject decision, and 6) therefore should be excluded from the analysis. Answer: True False 7) Overhead costs are sometimes incremental cash flows and other times are considered sunk costs. 7) Answer: True False 8) Interest payments on a loan obtained specifically to fund a new project should be considered an 8) incremental cash flow for the new project when determining the accept/reject decision. Answer: True False 9) To be included in a capital budgeting analysis, all incremental free cash flows must be expensed on 9) the company's books, otherwise generally accepted accounting principles will be violated. Answer: True False 10) In measuring cash flows we are interested only in the incremental or incremental after- tax cash flows that are attributed to the investment proposal being evaluated. Answer: True False 10) 11) The initial outlay for a new project is an example of an opportunity cost. 11) Answer: True False 12) Synergistic benefits from an investment project include cannibalism. 12) Answer: True False