Question

1. When determining relevant cash flows for project evaluation, we should _____.

a. discount interest expenses to the present

b. subtract interest expenses from EBIT

c. ignore interest expenses

d. add back in interest expenses after subracting taxes

2. When calculating incremental cash flows, we should exclude _____.

a. side effects

b. taxes

c. opportunity costs

d. sunk costs

3. When calculating incremental cash flows, we should include _____.

a. interest

b. sunk costs

c. financing expenses

d. opportunity costs

4. Even though depreciation is not a cash outflow, we should consider it in capital budgeting because _____.

a. accounting rules require asset depreciation

b. it changes EBIT, which is a cash outflow

c. asset values depreciate over time

d.it changes tax liabilities, which are a cash outflow

5. Which of these items does NOT add to or subtract from free cash flow by its full amount?

a. Depreciation

b. Opportunity costs

c. Side effects

d. Taxes

Answer 1

1. When determining relevant cash flows for project evaluation, we should:

c. ignore interest expenses.

Because interest expenses are accounted for through the discount rate.

2. When calculating incremental cash flows, we should exclude:

d. sunk cost.

Sunk costs are always excluded in calculating the incremental cash flows.

Side effects, taxes, and opportunity costs are considered in calculating the incremental cash flows.

3. When calculating incremental cash flows, we should include:

d. opportunity costs

Interest expenses, sunk costs, and finance expenses are excluded in calculating the incremental cash flows.

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