Int. Financial Management LS Chapter 11

Which of the following are reasons why NPV is considered a superior capital budgeting technique?

1) NPV considers time value of money 2) NPV considers all the cash flows

A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project:

1) is lower than its cost 2) cannot be observed

From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage:

as low as possible

The possibility that errors in projected cash flows will lead to incorrect decisions is known as:

estimation risk, forecasting risk

A firm with a higher operating leverage will have ____ fixed costs relative to a firm with low operating leverage.

high

A potential problem with DCF analysis is that a project may appear to have a positive NPV because the estimated cash flows are ___.

inaccurate

Which of the following is an example of a sunk cost?

research and development expense incurred in the past

When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in:

scenario analysis, what if questions

When using ___ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable.

sensitivity analysis

Which of the following is an opportunity cost in the context of a vacant building that a firm currently owns?

the potential rental income lost by using the empty building for a project

What is the relationship between variable costs and output?

total variable costs are directly related to the level of output

In a competitive market, positive NPVs are:

uncommon

Which of the following are true about depreciation expense?

1) it affects the accounting profit break even point 2) it affects cash flows 3) it is a non cash expense