Ch 8 and 9 Conceptual Questions
A proposed project will increase a firm's accounts payables. The increase is generally
A cash inflow at time zero and a cash outflow at the end of the project
Which one of the following refers to a method of increasing the rate at which an asset is depreciated
Accelerated cost recovery system
Electric has three positive NPV 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?
Capital rationing
The managers of HR 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 rente out the building and used the rent to pay off the mortgage. The building into a conference centre and sandwich bar at an estimated cost $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.
Current market value of the building
Which one of the following will increase the operating cash flow as computed using the tax shield approach
Decrease in fixed costs
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
Erosion
Forecasting risk is best defined as
Estimation risk
Isabella is considering three mutually exclusive options for the additional space she just added to her specialty womens 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. 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 options if any should isabella accept?
Exclusive gifts only
if a project with conventional cash flows has a profitability index of 1 the project will
Have an IRR that equals the required return
Scenario analysis
Helps determine the reasonable range of expectations for a projects net present value
Sensitivity analysis
Helps identify the variable within a project that presents the greatest forecasting risk
Based on the most recent survey information presented in the textbook, CFO's tend to use which two methods of investment and analysis the most frequently
IRR and NPV
The operating cash flows of a project
Include erosion effects
Assume a firm has positive net earnings. The operating cash flow of this firm
Increases when tax rates decrease
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?
Incremental cash flows
In which one of the following situations would the payback method be the preferred method of analysis?
Investment funds available only for a limited time period
The ability to delay an investment
Is valuable provided there are conditions under which the investment will have a positive net present value
Which one of the following is correct value to use if you are conducting a best case scenario analysis
Lowest expected value for fixed costs
The opportunities that a manager has to modify a project once it has started are called
Managerial options
Contingency planning focuses on the
Managerial options implicit in a project
Ignoring the option to wait
May underestimate the net present value of a project
Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows
Modified internal rate of return
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately she is not being given sufficient time to analyze that project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?
NPV
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
Net present value
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:
Operating cash flows of firm A is less than that of firm b for year 2
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
Opportunity cost
Turner industries started a new project three months ago, sales arising from this project are exceeds expectations. Given this which one of the following is management most apt to implement
Option to expand
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know what the expected dollar return per dollar spent on a given project. Which financial method of analysis will provide him with that info?
Profitability Index
Which one of the following indicates that a project is definitely acceptable?
Profitability index greater than 1
A pro forma financial statement is a financial statement that
Projects future years operations
Scenario analysis is best described as the determination of the
Reasonable range of project outcomes
The tax shield approach to computing the operating cash flow given a tax paying firm
Recognizes that depreciation creates a cash inflow
The net working capital invested in a project is generally
Recouped at the end of the project
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
Scenario analysis
Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's NPV. What type of analysis is mark conducting?
Sensitivity analysis
Marcos enterprises has three separate divisions. The firm allocations each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process
Soft rationing
Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?
Stand alone principle
Which one of the following refers to the option to expand info related businesses in the future
Strategic option
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to the depreciation
Tax shield
The corner market has decied 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 company has spent another $38,000 on land improvements all of which we also paid in cash. Today the lot has market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?
The current market value of the land
Which one of the following statements is correct when a firm faces hard rationing
The firm does not have funds to finance any new projects
Which one of the following is true if the managers of a firm only accept projects that have a profitability index greater than 1.5
The firm should increase in value each time the firm accepts a new project
An investment has conventional cash flows and a profitability index of 1. Given this which one of the following must be true
The net present value is equal to zero
You are using a net present value profile to compare investments A & B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?
The net present value of project A equals that of B, but generally does not equal zero
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 it for the fofer 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
The opportunity cost is the value of the current offer to buy the restaurant
Which one of the following statements is correct?
The payback method is biased towards short term projects
Which one of the following will occur when the internal rate of return equals the required return
The profitability index will equal 1
Scenario analysis asks questions such as
What is the best outcome that should reasonably be expected
Which of the following have the potential to increase the net present value of a proposed investment
ability to immediately shut down a project should the project become unprofitable ability to wait until the economy improves before making the investment option to place the investment on hold until a more favorable discount rate becomes available option to increase production beyond that initially projected
the average net income of a project divided by the projects average book value is referred to as the projects
average accounting rate
which one of the following analytical methods is based on net income
average accounting return
which one of the following methods of analysis ignores cash flows
average accounting return
which one of the following methods of analysis is most similar to computing the return on assets
average accounting return
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.
change in ticket sales for the existing coaster change in ticket sales for the boat ride change in food and beverage sales
the reinvestment approach to the modified internal rate of return
compounds all of the cash flows except for the initial cash flow to the end of the project
the net present value of an investment represents the difference between the investments
cost and its market value
the net present value
decreased as the required rate of return increases
The shoe box is considering adding a new line of winter footwear to its product line-up. Whihc of the following are relevant cash flows for this project?
decreased revenue from products currently being offered if this new footwear is added to the lineup revenue from the new line of footwear money spent to date looking for a new product line to add to the store's offerings
which on of the following defines the internal rate of return for a project
discount rate which results in a zero net present value for the project
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
division managers will vie with each other for additional capital allocations
which one of the following is the primary advantage of payback analysis
ease of use
Which of the following should be included in the analysis of a proposed investment
erosion effects opportunity costs side effects
Which of the following should be included when compiling pro forma statements for a proposed investment
forecasted sales start up costs aftertax salvage value of any assets sold
discounted cash flow valuation is the process of discounting an investments
future cash flows
the blackwell group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation?
hard rationing
which one of the following statements is correct
if the internal rate of return equals the required return the net present value will be zero
Which of the following are cash inflows from net working capital
increase in accounts payable decrease in accounts recievable
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, camping gear sales will decrease, and his model train sales will decrease. Which of the following should steve include in his revenue projection for the expansion project?
increase in fishing and hunting sales increase in camping gear sales decrease in model train sales
which one of the following is most closely related to the net present value profile
internal rate of return
which one of the following is an indicator that an investment is acceptable
internal rate of return that exceeds the required return
The profitability index reflects the value created per dollar
invested
payback is best used to evaluate which type of projects
low cost, short term
the average accounting return
measures profitability rather than cash flow
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
molds needed to from the serving trays projected increased in plate and silverware sales if the trays are produced a portion of the production manager's current annual salary of 75,000
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
money spent last month repairing a damaged front fender
the possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as
multiple rate of return
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?
mutually exclusive
which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investments opportunities
net present value
which one of the following methods of analysis has the greatest bias towards short term projects
payback
which one of the following methods of analysis ignores the time value of money
payback
which one of the following indicates that a project is expected to create value for its owners
positive net present value
which one of the following indicators offers the best assurance that a project will produce value for its owners
positive npv
which one of the following can be defined as a benefit-cost ratio
profitability index
which one of the following indicates that a project should be rejected
profitability index less than 0
the payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to
recoup its initial cost
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?
sunk
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 westons 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.
sunk
the net present value profile illustrates how the net present value of an investment is affected by which on of the following
the discount rate
the internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following
the investment is mutually exclusive with another investment under consideration
which one of the following statements is correct
the payback period ignores the time value of money
the payback method of analysis ignores which one of the following
time value of money
the modified internal rate of return is specifically designed to address the problems associated with which one of the following
unconventional cash flows
which of the following statements is correct
when internal rate of return is greater than the required return, the net present value is positive
if an investment is producing a return that is equal to the required return the investments net present value will be
zero
