Chapter 11 Cash Flows and Other Topics in Capital Budgeting

17) Depreciation expense produces a cash inflow equal to the depreciation expense multiplied by the firm's marginal tax rate.

18) TRL, Inc. has spent $2,000,000 in nonrefundable engineering fees in contemplation of building a convention center and the additional costs to complete the project are $18,000,000. The present value of all benefits the center will produce in its lifetime are $19,000,000, so TRL should not build the convention center.

19) Free cash flow calculations can be broken down into three parts: cash flows from operations, cash flows associated with working-capital requirements, and financing cash flows relating to interest and dividend payments.

20) An opportunity cost is a relevant incremental cost for capital budgeting decisions.

21) Capital budgeting projects that expand sales are more likely to involve increases in working capital than are projects that involve the replacement of existing assets.

22) Increases in inventory and accounts receivable expected to occur if a proposed advertising campaign is undertaken are examples of sunk costs.

23) In general, a project's free cash flows will fall into one of three categories: (1) incremental costs, (2) sunk costs, and (3) opportunity costs.

24) The initial outlay includes the cost of purchasing the asset and getting it operational, including the purchase price, shipping and installation, and any training costs for employees who will be operating the equipment, and any increases in working capital requirements.

25) The initial outlay includes the cost of purchasing the asset and getting is operational, but this excludes any training costs for employees which should be included as part of differential cash flows over the life of the project.

26) In a replacement decision, the initial outlay is equal to the cost of the new asset less the reduction in depreciation from elimination of the old asset.