When converting accounting profits to cash flows, we broadly deal with depreciation and working capital as follows: Depreciation Working capital A) add add at the start of the project, deduct at the end. B) deduct add at the start of the project, deduct at the end. C) add deduct at the start of the project, add at the end. D) deduct deduct at the start of the project, add at the end.

When converting accounting profits to cash flows, we broadly deal with depreciation and working capital as follows: Depreciation Working capital A) add add at the start of the project, deduct at the end. B) deduct add at the start of the project, deduct at the end. C) add deduct at the start of the project, add at the end. D) deduct deduct at the start of the project, add at the end.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 5Q

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Which of the following statements is true? a. The fixed asset turnover ratio assists managers in determining the estimated future capital expenditures that are needed. b. The average age of the fixed assets is computed by dividing accumulated depreciation by depreciation expense. c. If net sales increases, the fixed asset turnover ratio will decrease. d. A relatively low fixed asset turnover ratio signals that a company is efficiently using its assets.
Describe the calculation required to compute working capital. Explain the significance.
which of the following should not be included in the cash flows for project analysis? Opportunity costs side effects or erosion sunk costs operating cash flows for all years The initial investment in net working capital
Over the life of a project, a project’s accounting earnings equal to its net cash flows Group of answer choices a) True b) False
Which of the following statements is true with regard to cash flows resulting from financing costs? a. They should be included in the cash flow calculations. b. Financing cash flows cannot include dividend payments to stockholders and interest payments to bondholders. c. Financing costs are captured in the original investment of a project’s cash flows. d. If cash outflows associated with financing costs were deducted from the cash flows for a project, it would be double-counting the financing costs of the investment.
(b) Although depreciation is not a cash flow item, it plays an important role in thecalculation of cash flow. Describe the impact of depreciation on a project’s cash flow.
Which of the following formulas will correctly calculate Net Working Capital? A. Current assets + current liabilities B. Free cash flow + depreciation expenses C. Incremental earnings – capital purchases D. Current assets – current liabilities
Why should companies use a project’s cash flows rather thanaccounting income when determining a project’s NPV?
Under the indirect method of estimating project cash flows, an increase in trade creditors in a given year as a result of a project would be treated in what way? Treated as a cash inflow Treated as a cash outflow Excluded from the cash flow analysis as this is a sunk cost Excluded from the cash flow analysis as no cash has been paid or received
The indirect approach subtracts depreciation costs from net income before calculating operating cash flow.
While calculating Free Cash Flow (FCF), capital investment expenditure is : a Subtracted from from EBIT(1-t) +(Depreciation +Amortization) b Subtracted from EBT. c Subtracted from EBIT(1-t) d Subtracted from EBIT.
How does depreciation enter into the calculation of operating cash inflows? Explain theu underlyinglogic of such calculation process. Why is it important to evaluate capital budgetingp projectson the basis of incremental cash flows?

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	Depreciation	Working capital

A)	add	add at the start of the project, deduct at the end.
B)	deduct	add at the start of the project, deduct at the end.
C)	add	deduct at the start of the project, add at the end.
D)	deduct	deduct at the start of the project, add at the end.