FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Question
4) Which of the following
A) An increase in fixed costs due to leasing a new building for the project.
B) An increase in debtors and stocks expected to occur as a result of undertaking the project.
C) The purchase cost of materials that can be used in the project but that the company uses regularly in other operations.
D) Interest charges on a loan taken out to finance the project
Expert Solution
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Step 1 Net present value:
NPV can be calculated by subtracting present value of cash inflow from present value of cash outflows
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- Changes in net operating working capital can be excluded from a project's cash flows because the funds will be recaptured at the conclusion of the project. OA company that uses accelerated depreciation will have higher net income in the early years and lower net income in the later years, all other things held constant. O The ability to abandon a project if cash flows are lower than expected can have value irrespective of whether the project is of higher or lower than average risk. O Proper analysis of project's cash flows to determine its NPV requires that those cash flows include both opportunity costs and sunk costs. O Monte Carlo simulation can provide valuable information about the risk of a project's cash flow, such as the standard deviation of the cash flow, but it cannot tell us anything about the expected cash flow.arrow_forwardWhich of the following best describes the process of capital budgeting? a Forecasting revenues and expenses hmiting funds for capital improvements without considering the profitability of proposed prot determining a companys short term goals d. determinung the amount to spend on fixed assets and which fixed assets to purchasearrow_forwardWhich of the following statements is true? O The salvage value of new equipment should not be considered when using the internal rate of return method to evaluate a project. O The internal rate of return method assumes that the cash flows generated by a project are reinvested at a rate of return that equals the company's cost of capital. O The profitability index and the internal rate of return will always result in the same preference ranking for investment projects. O In calculating the profitability index, the initial investment in the project should be reduced by any proceeds from the sale of old equipment. O None of the above statements is true.arrow_forward
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