Chapter 9 Fin 3060

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

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

Which one of the following refers to the option to expand into related businesses in the future?

A. Strategic Option

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.

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?

B. Capital Rationing

The opportunities that a manager has to modify a project once it has started are called:

B. Managerial Options

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.

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

Scenario analysis asks questions such as:

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

Sensitivity analysis:

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

The ability to delay an investment:

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

Ignoring the option to wait:

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

Scenario analysis is best described as the determination of the:

B. reasonable range of project outcomes.

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?

C. Current market value of the building

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?

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

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?

C. Erosion

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?

C. Exclusive gifts only

The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation?

C. Hard rationing

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

C. I and III only

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

C. I, II, and IV only

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?

C. Incremental cash flows

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.

C. Money spent last month repairing a damaged front fender

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?

C. Sunk

Which one of the following statements is correct when a firm faces hard rationing?

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

Scenario analysis:

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:

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

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:

C. scenario analysis.

Which one of the following refers to a method of increasing the rate at which an asset is depreciated?

D. Accelerated Cost Recovery System

Which one of the following will increase the operating cash flow as computed using the tax shield approach?

D. Decrease in fixed costs

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? 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

D. I, II, and IV only

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

D. I, II, and IV only

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

D. Opportunity cost

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?

D. The current market value of the land

Assume a firm has positive net earnings. The operating cash flow of this firm:

D. increases when tax rates decrease.

Contingency planning focuses on the:

D. managerial options implicit in a project.

A pro forma financial statement is a financial statement that:

D. projects future years' operations.

The net working capital invested in a project is generally:

D. recouped at the end of the project.

Forecasting risk is best defined as:

E. Estimation Risk.

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

E. I, II, III, and IV

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

E. I, II, and III

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

E. II, III, and IV only

Which one of the following is a correct value to use if you are conducting a best case scenario analysis?

E. Lowest expected value for fixed costs

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?

E. Option to expand

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

E. Stand-alone principle

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?

E. Sunk Cost

A proposed project will increase a firm's accounts payables. This increase is generally:

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

The operating cash flows of a project:

E. include erosion effects.

The tax shield approach to computing the operating cash flow, given a tax-paying firm:

E. recognizes that depreciation creates a cash inflow

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