Chapter 11 Cash Flows and Other Topics in Capital Budgeting

11) The initial outlay for a new project is an example of an opportunity cost.

12) Synergistic benefits from an investment project include cannibalism.

13) A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.

14) Toyota's capital budgeting analysis for the Prius, a gas-electric hybrid, was faulty because the car line has not made a profit to date.

15) Accounting profits, adjusted for taxes and differences in accounting methods, provide the best measure of relevant cash flows for capital budgeting purposes.

16) Hershey's expects to sell $2 million of its new candy bar, although $200,000 of this amount would have been spent on its existing candy bar. The $2 million is the appropriate cash inflow for the new candy bar project, while the $200,000 will be counted against the return on the old candy bar.

17) Adding gourmet coffee stations to my convenience store is expected to increase sales of my breakfast sandwiches; however, the sales of breakfast sandwiches should not be included in the evaluation of the gourmet coffee project because only relevant, incremental cash flows should be considered.

18) As a rule, any cash flows that are not affected by the accept/reject criterion should not be included in capital-budgeting analysis.

19) If a project uses an asset the corporation already owns, the cost of that asset for capital budgeting purposes is zero to reflect the advantage the project has over projects that require the purchase of new assets.

20) For companies in competitive markets, the evolution and introduction of new products may serve more to preserve market share than to expand it.