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Finance 3040, Chapter 9
Terms in this set (14)
It is never appropriate to include
Sunk costs in the evaluation of a project.
The opportunity cost of an asset
Should be used to discount the project cash flows.
Investments in working capital
Reduce project NPV
Allocations of overheads should not affect a project's incremental cash flows unless
The project actually changes the total amount of overhead expenses.
The correct method to handle overhead costs in capital budgeting
Is to ignore all except incremental amounts
The NPV of an investment proposal becomes negative solely as a result of allocating a portion of the corporation president's salary. It's most likely the case that
The project should be accepted
Capital budgeting proposals should be evaluated
As if the project were financed entirely by equity.
When calculating cash flow from operations, one should
Add depreciation to after-tax profit.
The rationale for not including sunk costs in capital budgeting decisions is that they
Have no incremental effect on project cash flows.
Depreciation expense affects investment projects
By reducing taxable income by the amount of the depreciation expense.
A tax shield is equal to the redecution
In a firm's total tax liability resulting from a tax deductible expense.
When a depreciable asset is ultimately sold, the sales price is
Taxable to the extent that the sales price exceeds it's book value.
The depreciation tax sheild is not
Altered by inflation.
Cash flows from operations equations
(revenues-cash expenses)(1-tax rate) + (depreciation x tax rate) ; (revenues-cash expenses-taxes) ; (net profit + depreciation)
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