Question 1 (1 point) MACRS, generally speaking, is an \'accelerated depreciation

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Question 1 (1 point)

MACRS, generally speaking, is an 'accelerated depreciation' method.

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Question 2 (1 point)

A cost that has already been incurred and cannot be recovered is called an 'erosion cost'.

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Question 3 (1 point)

In anticipation of, but prior to, the introduction of a new product line, a feasibility study was contracted and paid for. The cost of this study should be included in a capital budgeting analysis.

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Question 4 (1 point)

We add a new product line, and as a result other product lines enjoy a higher level of sales too. This is an example of 'synergy benefits'.

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Question 5 (1 point)

One of the costs of a proposed new product line is that additional service reps will need to be hired. The cost of both the new and the existing service reps should be included in a capital budgeting analysis.

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Question 6 (1 point)

Because the purchase price of old equipment is a sunk cost, the sale of that equipment should have no impact on a capital budgeting analysis.

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Question 7 (1 point)

Because depreciation is a 'non-cash' expense, it has no impact on a capital budgeting analysis.

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Question 8 (1 point)

In order to purchase new equipment, a firm must borrow money. The interest expense and its tax consequences should both be included in a capital budgeting analysis.

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Question 9 (1 point)

Opportunity costs incurred due to a proposed project generally should be included in the capital budgeting analysis.

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Question 10 (1 point)

In order to start a new product line, inventories must be built up. This increase entails a cash outflow that should be included in a capital budgeting analysis.

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Question 11 (1 point)

If a sale of old equipment results in a loss, the loss is magnified (made larger) by the tax impact of the loss.

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Question 12 (1 point)

Even if a capital budgeting analysis indicates a project will have a positive NPV, the project could in fact turn out not to be profitable.

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Explanation / Answer

1) True. MACRS is accelerated depreciation

2) False. Cost that has been incurred and cannot be recovered is called as sunk cost.

3) False. Cost for feasibility study is sunk cost.

12) False. Positive NPV means profitable project.

11) False. Loss will be minimized to tax benefit associated with losses.

10) True. This is working capital requirement for the project and should be considered.

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