15) CASH FLOW ESTIMATION. Which of the following items is NOT part of the initia
ID: 2768878 • Letter: 1
Question
15) CASH FLOW ESTIMATION. Which of the following items is NOT part of the initial cash flow in capital budgeting? [i] Change in depreciation [ii] Additional working capital requirement [iii] Shipping and installation costs [iv] Project modification costs [v] Cost incurred previously but which relates to the capital project at hand
A) i and iii
C) iii and v
D) i and v
16) Which of the following statements is TRUE? [I] An increase in depreciation expenses would generally cause a firm's net income to rise [II] An increase in depreciation expenses would generally cause a firm's net cash flow to rise [III] If a single project has a normal cash flow pattern, the NPV, IRR and MIRR would give the same accept/reject decision [IV] When a project has non normal cash flows, there may be more than one IRR although the MIRR would usually produce a unique solution [V] If mutually exclusive projects have unequal lives, the IRR, and not the NPV, should be used to make capital budgeting decision
A) II, III, IV
C) I, III, IV
D) II, IV, V
E) IV and V
18) For this and the next question: Consider the following mutually exclusive projects, P and Q with r = 10%: Which of the two projects should be accepted?
Year
P
Q
0
-$1,100
-$1,100
1
800
200
2
500
400
3
100
1,000
A) Both projects
C) Project Q, because its NPV is $163.71
D) None of the projects should be selected
22) For this and the next question (Assume earnings growth): Aon Electronics has EBIT of $200,000, a growth rate of 6%, and faces a tax rate of 40%. In order to support growth, Aon must reinvest 20% of its EBIT in net operating assets. The firm has $300,000 in 8% debt outstanding. A similar company with no debt has a cost of equity of 11% (i.e. rEU = 11%). According to the MM extension with growth, what is the value of Aon's interest tax savings?
A) $87,273
C) $288,000
D) $192,000
E) $300,000
Year
P
Q
0
-$1,100
-$1,100
1
800
200
2
500
400
3
100
1,000
Explanation / Answer
15)
Depreciation will not show any effect on the initial cash flows. It is an operating cash flow item. Costs incurred in past are sunk costs and does not have relevance in decision making.
Hence, correct option is (D)
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