BSAD 180 Exam 3 Question and
answers rated A+
Relevant cash flows - correct answer Cash flows that should be included in a
capital budgeting analysis because they will only occur if the project is
accepted (i.e. incremental cash flows)
Stand-alone principle - correct answer Allows us to analyze each project in
isolation from the firm simply by focusing on incremental cash flows. The firm
is the sum of its parts
Incremental cash flows - correct answer Cash flows matter (Not accounting
earnings)
- Sunk costs are not relevant
- Incremental costs do matter (Opportunity costs, side effects, taxes)
OCF Formula - correct answer EBIT - Taxes + Depreciation
NCS Formula - correct answer (End net fixed assets - beg net fixed assets) +
Depreciation
NWC Formula - correct answer (End assets - liabilities) - (Beg assets -
liabilities)
Interest expense - correct answer It is enough to assume that the firm's level
of debt is independent of the project at hand
- Later, chapters will deal with the impact that the amount of debt a firm has in
its capital structure has on firm value
, Project Cash flows formula - correct answer Project Operating cash flow
(OCF) - Project change in net working capital (NWC) - Project Capital
Spending (NCS)
Book value formula - correct answer Initial cost - accumulated depreciation
After-tax salvage formula - correct answer Salvage - T(Salvage - book value)
When to accept project? - correct answer If NPV is positive
Other methods for computing OCF - correct answer - Bottom-up approach:
Works only when there is no interest expense, OCF = NI + Depreciation
- Top-down approach: OCF = Sales - Costs - Taxes, Don't subtract non-cash
deductions
- Tax Shield Approach: OCF = (Sales - costs)(1 - tax rate) + Depreciation*tax
rate
Evaluating options with different lives - correct answer - Possibilities have
different lives
- We assume we will have to buy one of the options indefinitely (after an
option wears out we buy it again)
- One method is to look for an equivalent annual cost (EAC) for comparison
purposes
Individual securities - correct answer The characteristics of individual
securities that are of interest are the:
- Expected return
- Variance and standard deviation
- Covariance and correlation (to another security or index)
answers rated A+
Relevant cash flows - correct answer Cash flows that should be included in a
capital budgeting analysis because they will only occur if the project is
accepted (i.e. incremental cash flows)
Stand-alone principle - correct answer Allows us to analyze each project in
isolation from the firm simply by focusing on incremental cash flows. The firm
is the sum of its parts
Incremental cash flows - correct answer Cash flows matter (Not accounting
earnings)
- Sunk costs are not relevant
- Incremental costs do matter (Opportunity costs, side effects, taxes)
OCF Formula - correct answer EBIT - Taxes + Depreciation
NCS Formula - correct answer (End net fixed assets - beg net fixed assets) +
Depreciation
NWC Formula - correct answer (End assets - liabilities) - (Beg assets -
liabilities)
Interest expense - correct answer It is enough to assume that the firm's level
of debt is independent of the project at hand
- Later, chapters will deal with the impact that the amount of debt a firm has in
its capital structure has on firm value
, Project Cash flows formula - correct answer Project Operating cash flow
(OCF) - Project change in net working capital (NWC) - Project Capital
Spending (NCS)
Book value formula - correct answer Initial cost - accumulated depreciation
After-tax salvage formula - correct answer Salvage - T(Salvage - book value)
When to accept project? - correct answer If NPV is positive
Other methods for computing OCF - correct answer - Bottom-up approach:
Works only when there is no interest expense, OCF = NI + Depreciation
- Top-down approach: OCF = Sales - Costs - Taxes, Don't subtract non-cash
deductions
- Tax Shield Approach: OCF = (Sales - costs)(1 - tax rate) + Depreciation*tax
rate
Evaluating options with different lives - correct answer - Possibilities have
different lives
- We assume we will have to buy one of the options indefinitely (after an
option wears out we buy it again)
- One method is to look for an equivalent annual cost (EAC) for comparison
purposes
Individual securities - correct answer The characteristics of individual
securities that are of interest are the:
- Expected return
- Variance and standard deviation
- Covariance and correlation (to another security or index)
