Question

Please help assist on answering the following:

1. The cash flows of a project should include the related changes in the tax account. True or False?

2. Taxes are considered cash flows of a project. True or False?

3. Fixed Costs causes operating cash flow to differ from net income. True or False?

4. Taxes causes operating cash flow to differ from net income. True or False?

5. Fixed costs must be paid even if production is halted. True or False?

6. A project with a high degree of operating leverage has an initial cash outlay that is generally relatively large in relation to the size of the project. True or False?

7. A project with a low degree of operating leverage is capital intensive. True or False?

8. The higher degree of operating leverage, the more the danger from forecasting risk. True or False?

Answer 1

As per rules I am answering the first 4 subparts of the question

1: True

(the cash flows of the project should take into account changes in tax because that is relevant for decision-making. If the taxes are higher, they will be greater cash outflows and vice versa)

2: True

Taxes are relevant for decision-making since they impact cash flows. Taxes to be paid will be a cash outflow while tax saving will be considered a cash inflow.

3: False

The difference between net income and operating cash flow arises due to noncash expenditure such as depreciation.

4: False

The tax impact is considered in both net income and operating cash flow and hence that does not create the difference.