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ch. 9
| Question | Answer |
|---|---|
| 1. The incremental cash flows of a project can best be defined as the difference between a firm’s _____ with and without the project. | . future cash flows |
| 2. The stand-alone principle is the assumption that the evaluation of a project may be based on the project’s: | incremental cash flows |
| 3. A cost that has already been incurred and cannot be recouped is referred to as a(n) _____ cost. | sunk |
| 4. An opportunity cost is defined as: | the most valuable alternative that is given up if a particular investment is undertaken. |
| 5. A reduction in the sales of a current product whenever a new product is introduced by a firm is called: | erosion. |
| 6. A pro forma financial statement is a financial statement which: | projects future years’ operations. |
| 7. The depreciation tax shield is defined as: | D × T. |
| 8. A U.S. depreciation system which allows for more rapid depreciation under various classifications is called the _____ system. | accelerated cost recovery |
| 9. Forecasting risk can be defined as the possibility that _____ will lead to incorrect decisions. | errors in projected cash flows |
| 10. The analysis of the effects that what-if questions have on a project is referred to as _____ analysis. | . scenario |
| 11. The analysis of the effect that a single variable has on the net present value of a project is called _____ analysis. | . sensitivity |
| 12. The opportunities to change the way a product is priced, manufactured, or advertised in the future are referred to as: | . managerial options. |
| 13. Contingency planning is the consideration of the: | managerial options implicit in a project. |
| 14. The options that a company has to expand their business into related products are referred to as _____ options. | strategic |
| 15. The situation a firm faces when it has positive net present value projects but cannot obtain financing for those projects is referred to as: | capital rationing. |
| 16. Soft rationing is best defined as the situation that exists when: | d. the units within a business are allotted a fixed amount of money for their annual capital spending. |
| 17. When a firm cannot raise financing for a project under any circumstances, the firm is facing a situation known as: | hard rationing. |
| 18. The Shoe Co. is considering adding a new line of sandals to their product line-up. Which of the following are relevant cash flows for this project? I. the current revenue generated from the sale of their existing sandals II. the additional rev | II and IV only |
| 19. ABC Plastics currently produces plastic plates. The company is considering expanding their production to include plastic silverware. Payment for which of the following are relevant to this project? I. the plastic used to make the silverware | I, II, and IV only |
| 20. Lauer’s have decided to expand their retail shop by building on a vacant lot they own. The company will build a new building at an estimated cost of $1.8 million. The firm will spend another $400 thousand on the parking and access roads. The l | $5.0 million |
| 21. Alfsonso and Sons purchased a new grinding machine 2 years ago at a cost of $390,000. Last year, some revolutionary developments occurred making their machine virtually worthless as it cannot produce products which meet the higher quality | sunk |
| 22. The Siverly Hill Billies are discussing their old truck. Which one of the following items from their discussion represents a sunk cost? | new fuel tank they put on last week |
| 23. Freley Enterprises is considering two different development plans for an old building they own and want to restore. The building was purchased five years ago for $237,500. The first plan is to create an executive resort and conference centre a | $275,000 |
| 24. Mercy Motors owns a small engine repair shop. The company is trying to determine whether or not they should update the shop. To modernize the shop, Mercy estimates will require $350,000 in new machines and equipment and $120,000 in building | $380,000 |
| 25. Kate’s Store is considering three mutually exclusive options for the use of the new addition to her facility. Kate can either expand the women’s clothing section, add a new footwear section, or expand into home linens. She estimates annual pro | $104,000 |
| 26. Jeff’s Sporting Goods sells fishing, hunting, and camping equipment. Jeff is contemplating greatly expanding the selection and variety of his hunting equipment. If he does this, he expects his fishing and hunting sales will increase and his ca | Only the change in the camping equipment sales is an erosion effect. |
| 27. Lakeside Amusement Park is adding a new thriller roller coaster to their park. They expect this addition to increase their overall ticket sales. On individual rides, they expect the ridership of their old roller coaster to increase along with | the change in the ridership of the creeper ride |
| 28. The Brick and Mortar Book Shop has decided to sell books on-line. Currently, their greatest sellers are young children’s books. On-line, they expect to sell primarily fiction to teenagers. Which one of the following would be an erosion cost re | c. less in-store sales because of the convenience of on-line shopping |
| 29. The net working capital invested in a project is generally: | recouped at the end of the project |
| 30. A proposed project will reduce the amount of inventory a firm must keep on hand. This effect: | |
| 31. The effects that projects have on the current accounts of a firm are captured in the: | . net working capital cash flows. |
| 32. Compiling pro forma income statements for a project can allow the financial managers of a firm to see: I. the dollar changes in the sales revenue over a period of time. II. the effect that depreciation has on the net income for each time perio | I, II, III, and IV |
| 33. Operating cash flow is equal to: | EBIT minus taxes plus depreciation. |
| 34. Operating cash flow includes: | all of the cash expenses of a firm except interest expense |
| 35. The operating cash flow of a taxable firm: | can be computed using the tax shield approach. |
| 36. The tax shield approach computes the operating cash flow of a firm using the formula: | (Sales − Costs) × (1 – T) + (D × T) |
| 37. Using the tax shield approach, a(n) _____ will increase the operating cash flow. | increase in depreciation |
| 38. Which one of the following can be completely ignored when analyzing a project? | sunk cost |
| 39. Which one of the following statements is correct concerning MACRS? | A fixed asset classified as 5-year property is depreciated to a zero book value over 6 years. |
| 40. Scenario analysis asks questions such as: | What is the best outcome that is reasonably possible for this project? |
| 41. Scenario analysis can be thought of as the: | means of answering “What if?” questions that affect multiple variables simultaneously. |
| 42. Sensitivity analysis: | helps identify the variable within a project that presents the greatest forecasting risk. |
| 43. Which of the following are examples of managerial options? I. changing the price of a product II. discontinuing the production of a product III. waiting for a period of time before commencing a project IV. changing the production process by wh | e I, II, III, and IV |
| 44. Ignoring the option to expand: | underestimates the net present value of a project. |
| 45. If a manager ignores the option of scaling back a project, he or she: | misses something of value when analyzing a project. |
| 46. The postponement of a project until conditions are more favorable: I. is a valuable option. II. is referred to as the option to expand. III. could cause a negative net present value project to become a positive net present value project. I | I and III only |
| 47. Under soft rationing, it would be common to find that division managers within a firm: | compete to increase their capital allocation. |
| 48. Which one of the following rates of return expresses the required return for a firm facing hard rationing? | a rate so large that no project has a positive net present value |
Created by:
martin.2021