FIN 340: Ch. 9 SB
When we estimate the best-care, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in ________.
-scenario analysis -asking what-if questions
Which of the following is true relative to capital rationing?
-soft rationing is typically internal in that firm allocates funds to divisions for capital projects -hard rationing implies the firm is unable to raise funds for projects
The rules for depreciating assets for tax purposes are based upon provisions in the:
1986 Tax Reform Act
The project cash flow equals the project operating cash flow _________ project change in NWC project capital spending.
minus
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
-IRR -NPV -payback period
Cash flows used in project estimation should always reflect:
-after tax cash flows -cash flows when they occur
Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?
-book value represents the purchase price minus the accumulated depreciation -there will be a tax savings if the book value exceeds the sales price -taxes are based on the difference between the book value and the sales price
Which of the following are components of project cash flow?
-capital spending -operating cash flow -change in net working capital
A manager has estimated a positive NPV for a project. What could drive this result?
-cash flow estimations are inaccurate -overly optimistic management could drive this result -project is a good investment
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
-considers the riskiness of the project -considers all the cash flows -considers time value of money -properly chooses among mutually exclusive projects
Investment in net working capital arises when __________.
-credit sales are made -inventory is purchased -cash is kept for unexpected expenditures
The possibility that errors in projected cash flows will lead to incorrect decisions is known as __________-.
-estimation risk -forecasting risk
The goals of risk analysis in capital budgeting include ________.
-identifying critical components -assessing the degree of financing risk
Though depreciation is a non-cash expense, it is important to capital budgeting for these reasons:
-it affects a firm's annual tax liability -determines taxes owed on fixed assets when they are sold -determines the book value of assets which affects net salvage value
Which of the following qualify as "managerial options"?
-option to wait, expand, and abandon
An option on a real asset rather than a financial asset is known as a ________.
-real option -managerial option
Interest expenses incurred on debt financing are _________ when computing cash flows from a project.
ignored
Which of the following is an example of a sunk cost?
project consultation fee
Erosion will ___________ the sales of existing products.
reduce
The first step in estimating cash flow is to determine the __________ cash flows.
relevant
To investigate the impact on NPV of a change in one variable, you would employ _________.
sensitivity analysis
In order to analyze the risk of a project's NPV estimate, we should establish ________ for each important estimate variable.
upper and lower bounds
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.
cannot be observed
T OR F: In calculating cash flows, you should consider all financing costs.
FALSE
T OR F: Taxes are based on the difference between the initial cost and the sales price.
FALSE
T OR F: Investment in net working capital may arise from the need to cover credit sales
TRUE
T OR F: Investment in net working capital may arise from the need to cover credit sales.
TRUE
T OR F: 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