Finance Exam 2

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? -Salvage value -Terminal cost -Sunk cost -Opportunity cost -Erosion cost

Opportunity cost

Operating leverage is the degree of dependence a firm places on its: variable costs. fixed costs. sales. operating cash flows. depreciation tax shield.

fixed costs.

As the degree of sensitivity of a project to a single variable rises, the: -less important the variable is to the final outcome of the project. -less volatile the project's net present value is to that variable. -greater is the importance of accurately predicting the value of that variable. -greater is the sensitivity of the project to the other variable inputs. -less volatile is the project's outcome.

greater is the importance of accurately predicting the value of that variable.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: incremental cash flows. internal cash flows. external cash flows. erosion effects. financing cash flows.

incremental cash flows.

Net present value: -is the best method of analyzing mutually exclusive projects. -is less useful than the internal rate of return when comparing different-sized projects. -is the easiest method of evaluation for non financial managers. -cannot be applied when comparing mutually exclusive projects. -is very similar in its methodology to the average accounting return.

is the best method of analyzing mutually exclusive projects.

The base-case values used in scenario analysis are the values considered to be the most: optimistic. desired by management. pessimistic. likely to create a positive net present value. likely to occur.

likely to occur.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: -incremental cash flows. -internal cash flows. -external cash flows. -erosion effects. -financing cash flows.

incremental cash flows.

Humberto is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using? Simulation testing Sensitivity analysis Break-even analysis Rationing analysis Scenario analysis

Scenario analysis

Which one of these statements related to discounted payback is correct? -Payback is a better method of analysis than discounted payback. -Discounted payback is used more frequently in business than payback. -Discounted payback does not require a cutoff point. -Discounted payback is biased towards short-term projects. -The discounted payback period increases as the discount rate decreases.

Discounted payback is biased towards short-term projects.

Which of the following are advantages of the payback method of project analysis? Considers time value of money; liquidity bias Liquidity bias; subjective cutoff point Liquidity bias; ease of use CorrectIgnores time value of money; ease of use Ease of use; subjective cutoff point

Liquidity bias; ease of use

Pro forma statements for a proposed project should generally do all of the following, except: -be compiled on a stand-alone basis. -include all project-related fixed asset acquisitions and disposals. -include all the incremental cash flows related to the project. -include taxes. -include interest expense.

include interest expense.

Net present value: -is the best method of analyzing mutually exclusive projects. -is less useful than the internal rate of return when comparing different-sized projects. -is the easiest method of evaluation for nonfinancial managers. -cannot be applied when comparing mutually exclusive projects. -is very similar in its methodology to the average accounting return.

is the best method of analyzing mutually exclusive projects.

Which one of the following types of costs was incurred in the past and cannot be recouped? Incremental Side Sunk Opportunity Erosion

sunk

A project has a net present value of zero. Given this information: -the project has a zero percent rate of return. -the project requires no initial cash investment. -the project has no cash flows. -the summation of all of the project's cash flows is zero. -the project's cash inflows equal its cash outflows in current dollar terms.

the project's cash inflows equal its cash outflows in current dollar terms.

When analyzing a project, scenario analysis is best suited to accomplishing which one of the following? -Determining how fixed costs affect NPV -Estimating the residual value of fixed assets -Identifying the potential range of reasonable outcomes -Determining the minimal level of sales required to break even on an -accounting basis -Determining the minimal level of sales required to break even on a financial basis

Identifying the potential range of reasonable outcomes

Which one of the following will decrease the net present value of a project? -Increasing the value of each of the project's discounted cash inflows -Moving each cash inflow forward one time period, such as from Year 3 to Year 2 -Decreasing the required discount rate -Increasing the project's initial cost at Time 0 -Increasing the amount of the final cash inflow

Increasing the project's initial cost at Time 0

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? -Net present value -Discounted payback -Internal rate of return -Profitability index -Payback

Net present value

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? Scenario Simulation Break-even Sensitivity Cash flow

Sensitivity

Assume you graph a project's net present value given various sales quantities. Which one of the following statements is correct regarding the resulting function? -The steepness of the function relates to the project's degree of operating leverage. -The steeper the function, the less sensitive the project is to changes in the sales quantity. -The resulting function will be a hyperbole. -The resulting function will include only positive values. -The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

The depreciation tax shield is best defined as the: -amount of tax that is saved when an asset is purchased. -tax that is avoided when an asset is sold as salvage. -amount of tax that is due when an asset is sold. -amount of tax that is saved because of the depreciation expense. -amount by which the aftertax depreciation expense lowers net -income.

amount of tax that is saved because of the depreciation expense.

Sensitivity analysis determines the: -range of possible outcomes given that most variables are reliable only within a stated range. -degree to which the net present value reacts to changes in a single variable. -net present value range that can be realized from a proposed project. -degree to which a project relies on its initial costs. -ideal ratio of variable costs to fixed costs for profit maximization.

degree to which the net present value reacts to changes in a single variable.

Forecasting risk is defined as the possibility that: -some proposed projects will be rejected. -some proposed projects will be temporarily delayed. -incorrect decisions will be made due to erroneous cash flow. -some projects will be mutually exclusive. -tax rates could change over the life of a project.

incorrect decisions will be made due to erroneous cash flow projections.

You are evaluating a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider: lowering the degree of operating leverage. lowering the contribution margin per unit. increasing the initial cash outlay. increasing the fixed costs per unit. lowering the operating cash flow.

lowering the degree of operating leverage.

The length of time a firm must wait to recoup the money it has invested in a project is called the: -internal return period. -payback period. -profitability period. -discounted cash period. -valuation period.

payback period.

Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis. -forecasting -combined -complex -simulation -break-even

simulation

Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis. forecasting combined complex simulation break-even

simulation

Cerda Diagnostics spent $5,000 last week repairing equipment. This week the company is trying to decide whether the equipment could be better utilized by assigning it to a proposed project. When analyzing the proposed project, the $5,000 should be treated as which type of cost? Opportunity Fixed Incremental Erosion Sunk

sunk

Which one of the following types of costs was incurred in the past and cannot be recouped? -Incremental -Side -Sunk -Opportunity -Erosion

sunk

Simulation analysis is based on assigning a _____ and analyzing the results. narrow range of values to a single variable narrow range of values to multiple variables simultaneously wide range of values to a single variable wide range of values to multiple variables simultaneously single value to each of the variables

wide range of values to multiple variables simultaneously