Finance unit 2 chp 9
If a firm's sales estimate used in its base-case analysis is 1,000 units per year and they anticipate the upper and lower bounds to be ± 15 percent, What is the "best case" for units sold per year?
1,150
If a new project requires an investment in net working capital when it is launched, then at the end of the project, NWC will be:
100 percent reversed.
Opportunity costs are ______.
benefits lost due to taking on a particular project
What is net working capital?
current assets minus current liabilities
Incremental cash flows come about as a(n) ______ consequence of taking a project under consideration.
direct
True or false: Fixed costs cannot be changed over the life of the investment.
false
True or false: Operating cash flow is based on the salvage value of equipment.
false
Sunk costs are costs that ______.
have already occurred and are not affected by accepting or rejecting a project
The difference between a firm's cash flows with a project versus without the project is called ______.
incremental cash flows
In the context of capital budgeting, what does sensitivity analysis do?
it examines how sensitive a particular NPV calculation is to changes in underlying assumptions.
The project cash flow equals the project operating cash flow _____ project change in NWC minus project capital spending.
minus
Accounts receivable and accounts payable are included in project cash flow estimation as part of changes in ______.
net working capital
The difference between a firm's current assets and its current liabilities is known as the ______.
net working capital
The most valuable alternative that is given up if an investment is undertaken is called what?
opportunity cost
Which of the following is an example of a sunk cost?
project consultation fee
Given a level of investment in net working capital, that same investment must be ______ at some time in the future.
recovered
One of the most important steps in estimating cash flow is to determine the ______ cash flows.
relevant
Opportunity costs are classified as ______ costs in project analysis.
relevant
The first step in estimating cash flow is to determine the ______ cash flows.
relevant
Which of the following is an example of an opportunity cost?
rental income likely to be lost by using a vacant building for an upcoming project
What is the difference between scenario analysis and sensitivity analysis?
scenario analysis considers a combination of factors for each scenario, while sensitivity analysis focuses on only one variable at a time.
What is scenario analysis?
scenario analysis determines the impact on NPV of a set of events relating to a specific scenario.
Scenario analysis considers a combination of factors for each scenario, while _____ analysis focuses on only one variable at a time.
sensitivity
To investigate the impact on NPV of a change in one variable, you would employ _____.
sensitivity analysis
True or false: Investment in net working capital may arise from the need to cover credit sales.
true
True or false: Net working capital will be recovered at the end of a project.
true
True or false: To prepare proforma financial statements, estimates of quantities such as unit sales, selling price per unit, variable cost per unit, and total fixed costs are required.
true
In order to analyze the risk of a project's NPV estimate, we should establish ______ for each important estimate variable. Multiple choice question.
upper and lower bounds
The basic approach to evaluating cash flow and NPV estimates involves asking ______.
what-if questions
If a firm's variable cost per unit estimate used in its base-case analysis is $50 per unit and they anticipate the upper and lower bounds to be ± 10 percent, what is the "worst case" for variable cost per unit? Multiple choice question.
$55
The goals of risk analysis in capital budgeting include ______.
- identifying critical components - assessing the degree of forecasting risk
Investment in net working capital arises when ______.
- inventory is purchased - credit sales are made - cash is kept for unexpected expenditures
Which of the following are fixed costs?
- rent on a production facility - cost of equipment
Broadband, Inc., has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $400,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of ______ as the base case.
400,000
Estimates of which of the following are needed to prepare pro forma income statements?
- unit sales - variable costs - selling price per unit
Which of the following are components of project cash flow?
- operating cash flow - change in net working capital - capital spending
When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in
- scenario analysis - asking what-if questions
Operating cash flow is a function of _________.
- taxes - earnings before interest and taxes - depreciation
