How is depreciation treated in the indirect method of estimating project cash flows? O Include the cash amount of depreciation in the project's cash flows each year O Add back depreciation in arriving at profit before tax, then deduct after tax has been deducted Deduct depreciation in arriving at profit before tax, then add back after tax has been deducted O Ignore completely as it is à non-cash expense OOO

How is depreciation treated in the indirect method of estimating project cash flows? O Include the cash amount of depreciation in the project's cash flows each year O Add back depreciation in arriving at profit before tax, then deduct after tax has been deducted Deduct depreciation in arriving at profit before tax, then add back after tax has been deducted O Ignore completely as it is à non-cash expense OOO

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 2MAD

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To get a project's after-tax cash flow, you must subtract depreciation as though it is an expense from the taxable income and then add it back again as though it is a positive cash flow to get the final net cash flow.a. Trueb. False
A characteristic of the payback method is that it: (See your Chapter 25 notes, page 9) Uses accrual accounting inflows in the numerator of the calculation Uses the estimated expected useful life of the asset in the denominator of the calculation Incorporates cash flows received after the payback period has been reached Is based on accounting income Incorporates the time value of money Ignores total project profitability
What name is given to the time value of money technique that discounts the after-tax cash flows for a project over its life to time period zero using the company’s minimum desired rate of return? a. net present value method b. capital rationing methodc. payback method d. average rate of return method e. accounting rate of return method
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Discussion:Is the added precision from including taxes and depreciation in calculating project cash flows worth the effort? Should they be included in the calculations? Please discuss and justify your answer.
In the payback method, depreciation is added back to net operating income when computing the annual net cash flow. True or False The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash outflows with the present value of its cash inflows. True or False The internal rate of return method assumes that the cash flows generated by the project are immediately reinvested elsewhere at a rate of return that equals the company's cost of capital. True or False An increase in the expected salvage value at the end of a capital budgeting project will increase the internal rate of return for that project. True False The minimum required rate of return is the discount rate that makes the net present value of the project equal to zero. True False The production budget is typically prepared before the direct materials budget. True False The selling and administrative budget is typically prepared…
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
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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
After-Tax Cash Flows: Final Disposal At the end of the life of the project, there are two major sources of cash: (1) release of working capital and (2) preparation, removal, and sale of the equipment (salvage value effects). Any working capital committed to a project is released at this point. The release of working capital is a cash inflow with no tax consequences. Disposing of an asset associated with a project also has cash consequences. At times, an asset may have a market value at the end of its life. The selling price less the cost of removal and cleanup produces a gross cash inflow. See Step 3 for how to calculate the tax effects associated with the disposal of an asset. Apply the Concepts A company invested $180,000 of working capital at the beginning of a project. At the end of the project, an asset has a selling price of $120,000. Its removal and cleanup costs total $30,000. The book value of the asset is $15,000. The tax rate is 40 percent. Required: Calculate the after-tax…
Which of the following cash flows are not considered in the calculation of the annual cash-flow for a capital investment proposal? Incremental costs. O Taxes. O Depreciation on the project. Proceeds from selling an old asset which is being replaced by a new asset. Change in revenue.
In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following except __________. a. changes in working capital resulting from the project, net of spontaneous changes in current liabilities b. changes in costs due to a general appreciation in those costs c. the amount (net of taxes) that we could realize from selling a currently unused building of ours that we intend to use for our project d. costs that have previously been incurred that are unrecoverable