Fin 3060 - Chapter 9

11. Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting? A. Sensitivity analysis B. Erosion planning C. Scenario analysis D. Cost-benefit analysis E. Opportunity cost analysis

A. Sensitivity analysis

16. Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process? A. Soft rationing B. Hard rationing C. Opportunity cost D. Sunk cost E. Strategic planning

A. Soft rationing

14. Which one of the following refers to the option to expand into related businesses in the future? A. Strategic option B. Contingency option C. Soft rationing D. Hard rationing E. Capital rationing option

A. Strategic option

7. The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: A. tax shield. B. credit. C. erosion. D. opportunity cost. E. adjustment.

A. tax shield.

15. Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation? A. Sensitivity analysis B. Capital rationing C. Soft rationing D. Contingency planning E. Sunk cost

B. Capital rationing

24. Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, needs modernized. He is trying to decide whether to accept an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what opportunity cost, if any should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash. A. There is no opportunity cost since the current restaurant is owned free and clear. B. The opportunity cost is the value of the current offer to buy the restaurant. C. The opportunity cost is the cost of the needed improvements. D.The opportunity cost is the present value of the loss of operating cash flows while the restaurant is closed for renovation. E.The opportunity cost is the cost of the renovations plus the loss of the operating cash flows during the renovation.

B. The opportunity cost is the value of the current offer to buy the restaurant.

40. Scenario analysis asks questions such as: A. How will changing the number of units sold affect the outcome of this project? B. What is the best outcome that should reasonably be expected? C. How much will a $1 increase in the variable cost per unit change the net present value? D. Will the net present value increase or decrease if the quantity sold increases by 100 units? E. How will the operating cash flow change if the depreciation method is changed?

B. What is the best outcome that should reasonably be expected?

42. Sensitivity analysis: A. looks at the most reasonably optimistic and pessimistic results for a project. B. helps identify the variable within a project that presents the greatest forecasting risk. C. is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional. D.is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. E . illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.

B. helps identify the variable within a project that presents the greatest forecasting risk.

46. The ability to delay an investment: A. is commonly referred to as the best case scenario. B. is valuable provided there are conditions under which the investment will have a positive net present value. C. ensures that the investment will have an expected net present value that is positive. D. offsets the need to conduct sensitivity analysis. E. is referred to as the option to abandon.

B. is valuable provided there are conditions under which the investment will have a positive net present value.

12. The opportunities that a manager has to modify a project once it has started are called: A. sensitivity choices. B. managerial options. C. scenario adjustments. D. restructuring options. E. erosion control measures.

B. managerial options.

44. Ignoring the option to wait: A. may overestimate the internal rate of return on a project. B. may underestimate the net present value of a project. C. ignores the ability of a manager to increase output after a project has been implemented. D. is the same as ignoring all strategic options. E. ignores the value of discontinuing a project early.

B. may underestimate the net present value of a project.

38. Scenario analysis is best described as the determination of the: A. most likely outcome for a project. B. reasonable range of project outcomes. C. variable which has the greatest effect on a project's outcome. D. effect that a project's initial cost has on the project's net present value. E. change in a project's net present value given a stated change in projected sales.

B. reasonable range of project outcomes.

23. The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased 8 years ago for $689,000. Over the past 8 years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $898,000. The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated present value of the future income from this centre is $2.9 million. Which one of the following defines the opportunity cost of the remodeling project? A. Initial cost of the building B. Cost of the remodeling C. Current market value of the building D. Initial cost of the building plus the remodeling costs E. Current market value of the building plus the remodeling costs

C. Current market value of the building

47. Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation? A. Division managers will be limited to accepting a single new project each. B. Division managers are being given blanket approval to accept all positive net present value projects. C. Divisions managers will vie with each other for additional capital allocations. D.Division managers will not receive any funding for new projects but will be allowed to expand current operations. E. Division managers will not receive capital funding for any project.

C. Divisions managers will vie with each other for additional capital allocations.

5. Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? A. Opportunity cost B. Sunk cost C. Erosion D. Replicated flows E. Pirated flows

C. Erosion

25. Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts department, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should Isabella accept? A. None of the options B. Fabric and quilting only C. Exclusive gifts only D. Exclusive gifts and decorator items only E. All three options

C. Exclusive gifts only

17. The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation? A. Contingency planning B. Soft rationing C. Hard rationing D. Sensitivity analysis E. Scenario analysis

C. Hard rationing

31. Which of the following are cash inflows from net working capital? I. increase in accounts payable II. increase in inventory III. decrease in accounts receivable IV. decrease in fixed assets A. II only B. III only C. I and III only D. III and IV only E. I, II, and III only

C. I and III only

19. Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product? I. molds needed to form the serving trays II. projected increase in plate and silverware sales if the trays are produced III. a portion of the production manager's current annual salary of $75,000 IV. raw materials used in the production of the serving trays A. I and IV only B. III and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV

C. I, II, and IV only

1. Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following? A. Eroded cash flows B. Deviated projections C. Incremental cash flows D. Directly impacted flows E. Assumed flows

C. Incremental cash flows

22. Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years. A. New tires that will be purchased this winter B. Costs of repairs needed so the truck can pass inspection next month C. Money spent last month repairing a damaged front fender D. Engine tune-up that is scheduled for this afternoon E. Cost for a truck driver for the remainder of the truck's useful life

C. Money spent last month repairing a damaged front fender

21. Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Weston's can no longer use the furnace nor have they been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost? A. Erosion B. Book C. Sunk D. Market E. Opportunity

C. Sunk

48. Which one of the following statements is correct when a firm faces hard rationing? A. All positive net present value projects will be accepted. B . Each division within a firm will be allocated an amount for capital expenditures that will be less than the total value of its positive net present value projects. C. The firm does not have funds to finance any new projects. D. The firm will fund only those projects that create value for its shareholders. E. The firm will only finance the projects which have the highest profitability index values.

C. The firm does not have funds to finance any new projects.

41. Scenario analysis: A. determines the impact a $1 change in sales has on the internal rate of return. B. determines which variable has the greatest impact on a project's net present value. C. helps determine the reasonable range of expectations for a project's anticipated outcome. D. evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return. E. determines the absolute worst and absolute best outcome that could ever occur.

C. helps determine the reasonable range of expectations for a project's anticipated outcome.

33. Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the: A. depreciation expense for Firm A will be greater than Firm B's expense every year. B. equipment has a higher value on Firm B's books than on Firm A's at the end of year two. C. operating cash flow of Firm A is less than that of Firm B for year two. D. market value of Firm A's equipment is greater than the market value of Firm B's equipment. E. market value of Firm B's equipment is greater than the market value of Firm A's equipment.

C. operating cash flow of Firm A is less than that of Firm B for year two.

10. Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as: A. sensitivity analysis. B. erosion planning. C. scenario analysis. D. benefit planning. E. opportunity evaluation.

C. scenario analysis

8. Which one of the following refers to a method of increasing the rate at which an asset is depreciated? A. Non-cash expense B. Straight-line depreciation C. Depreciation tax shield D. Accelerated cost recovery system E. Market based depreciation

D. Accelerated cost recovery system

37. Which one of the following will increase the operating cash flow as computed using the tax shield approach? A. Decrease in depreciation B. Decrease in sales C. Increase in variable costs D. Decrease in fixed costs E. Increase in the tax rate

D. Decrease in fixed costs

18. The Shoe Box is considering adding a new line of winter footwear to its product line-up. Which of the following are relevant cash flows for this project? I. decreased revenue from products currently being offered if this new footwear is added to the lineup II. revenue from the new line of footwear III. money spent to date looking for a new product line to add to the store's offerings IV. cost of new counters to display the new line of footwear A. I and IV only B. II and IV only C. II and III only D. I, II, and IV only E. II, III, and IV only

D. I, II, and IV only

28. Which of the following should be included in the analysis of a proposed investment? I. erosion effects II. opportunity costs III. sunk costs IV. side effects A. I only B. II only C. I and IV only D. I, II, and IV only E. I, II, III, and IV

D. I, II, and IV only

4. Which one of the following terms refers to the best option that was foregone when a particular investment is selected? A. Side effect B. Erosion C. Sunk cost D. Opportunity cost E. Marginal cost

D. Opportunity cost

20. The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land? A. The sum of the cash paid to date for both the lot and the improvements B. The original purchase price only C. The current market value of the land plus the cash paid for the improvements D. The current market value of the land E. Zero because the land and the improvements were purchased with cash

D. The current market value of the land

34. Assume a firm has positive net earnings. The operating cash flow of this firm: A. ignores both depreciation and taxes. B. is unaffected by the depreciation expense. C. must be negative. D. increases when tax rates decrease. E. is equal to net income minus depreciation.

D. increases when tax rates decrease.

13. Contingency planning focuses on the: A. opportunity costs involved with a project. B. sunk costs related to a project. C. economic effects on a project's profitability. D. managerial options implicit in a project. E. optional capital requirements of a project.

D. managerial options implicit in a project.

6. A pro forma financial statement is a financial statement that: A. expresses all values as a percentage of either total assets or total sales. B. compares actual results to the budgeted amounts. C. compares the performance of a firm to its industry. D. projects future years' operations. E. values all assets based on their current market values.

D. projects future years' operations.

29. The net working capital invested in a project is generally: A. a sunk cost. B. an opportunity cost. C. recouped in the first year of the project. D. recouped at the end of the project. E. depreciated to a zero balance over the life of the project.

D. recouped at the end of the project.

32. Which of the following should be included when compiling pro forma statements for a proposed investment? I. forecasted sales II. start-up costs III. aftertax salvage value of any assets sold IV. anticipated changes in net working capital A. I only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

E. I, II, III, and IV

45. Which of the following have the potential to increase the net present value of a proposed investment? I. ability to immediately shut down a project should the project become unprofitable II. ability to wait until the economy improves before making the investment III. option to place the investment on hold until a more favorable discount rate becomes available IV. option to increase production beyond that initially projected A. I only B. I and IV only C. II and III only D. I, II, and IV only E. I, II, III, and IV

E. I, II, III, and IV

26. Steve owns a store that caters primarily to men and their hobbies. He is contemplating greatly expanding the hunting and fishing section of the store. If he does this, he expects his fishing and hunting sales will increase, his camping gear sales will increase, and his model train sales will decrease. Which of the following should Steve include in his revenue projection for the expansion project? I. increase in fishing and hunting sales II. increase in camping gear sales III. decrease in model train sales A. I only B. II only C. I and III only D. II and III only E. I, II, and III

E. I, II, and III

27. Lakeside Rides is adding a new roller coaster to its amusement park. The firm expects this addition to increase its overall ticket sales and increase attendance at its park. In particular, the firm expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster? I. ticket sales for the new roller coaster II. change in ticket sales for the existing coaster III. change in ticket sales for the boat ride IV. change in food and beverage sales A. I only B. III only C. II and III only D. I, II, and III only E. II, III, and IV only

E. II, III, and IV only

39. Which one of the following is a correct value to use if you are conducting a best case scenario analysis? A. Sales price that is most likely to occur B. Lowest expected level of sales quantity C. Lowest expected salvage value D. Highest expected need for net working capital E. Lowest expected value for fixed costs

E. Lowest expected value for fixed costs

43. Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement? A. Option to wait B. Soft rationing C. Strategic option D. Option to abandon E. Option to expand

E. Option to expand

2. Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? A. Forecast assumption principle B. Base assumption principle C. Fallacy principle D. Erosion principle E. Stand-alone principle

E. Stand-alone principle

3. A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost? A. Fixed B. Forgotten C. Variable D. Opportunity E. Sunk

E. Sunk

30. A proposed project will increase a firm's accounts payables. This increase is generally: A. treated as an erosion cost. B. treated as an opportunity cost. C. a sunk cost and should be ignored. D. a cash outflow at time zero and a cash inflow at the end of the project. E. a cash inflow at time zero and a cash outflow at the end of the project.

E. a cash inflow at time zero and a cash outflow at the end of the project.

9. Forecasting risk is best defined as: A. reality risk. B. value risk. C. potential risk. D. management risk. E. estimation risk.

E. estimation risk.

35. The operating cash flows of a project: A. are unaffected by the depreciation method selected. B. are equal to the project's total projected net income. C. decrease when net working capital increases. D. include any aftertax salvage values. E. include erosion effects.

E. include erosion effects.

36. The tax shield approach to computing the operating cash flow, given a tax-paying firm: A. ignores both interest expense and taxes. B. separates cash inflows from cash outflows. C. considers the changes in net working capital resulting from a new project. D. is based on the fact that depreciation does not affect the operating cash flows. E. recognizes that depreciation creates a cash inflow.

E. recognizes that depreciation creates a cash inflow.