Chapter 9
Opportunity Cost
The most valuable alternative that is given up if a particular investment is undertaken
Include erosion effects
The operating cash flows of a project:
Managerial options
The opportunities that a manager has to modify a project once it has started are called?
Scenario Analysis
The determination of what happens to NPV estimates when we ask what-if questions
Incremental Cash Flows
The difference between a firm's future cash flows with a project and those without the project
Hard Rationing
17. The Blackwell Group is unable to obtain any financing for new projects under any circumstances. Which term best applies to this situation?
The current market value of the land
20. 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 product for the cost of land?
Money spent last month repairing a damaged front fender
22. 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 useable life of 8 years.
Recouped at the end of the project
29. The net working capital invested in a project is generally:
A cash inflow at time zero and and a cash outflow at the end of the project
30. A proposed project will increase a firm's accounts payables. This increase is generally:
Operating cash flow for firm A is less than that of Firm B for year two
33. Firm A uses straight line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 dollars 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:
May underestimate the net present value of a project
44. Ignoring the option to wait:
Is valuable provided there are conditions under which the investment will have a positive net present value
46. The ability to delay an investment:
Sunk Cost
A cost that has already been incurred and cannot be recouped and therefore should not be considered in an investment decision
Sunk
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?
Projects future years operations
A pro forma financial statement is a financial statement that:
Incremental Cash Flows
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which of the following?
Increases when tax rate decreases
Assume a firm has positive net earnings. The operating cash flow of this firm:
Managerial options implicit in a project
Contingency planning focuses on the:
Accelerated Cost Recovery System (ACRS)
Depreciation method under U.S. tax law allowing for the accelerated write-off of property under various classifications
Pro Forma Financial Statements
Financial Statements projecting future years' operations
Estimation risk
Forecasting risk is best defined as:
Sensitivity Analysis
Investigation of what happens to NPV when only one variable is changed
Scenario analysis
Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis Jamie is doing is best described as:
Capital Rationing
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 best describes the firm's situation?
Soft Rationing
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?
Sensitivity Analysis
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?
Divisions managers will vie with each other for additional capital allocations
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?
Managerial Options
Opportunities that managers can exploit if certain things happen in the future.
Strategic Options
Options for future, related business products or strategies
What is the best outcome that should reasonably be expected?
Scenario analysis asks questions such as:
Reasonable range of project outcomes
Scenario analysis is best described as the determination of the:
Helps determine the reasonable range of expectations for a project's anticipated outcome
Scenario analysis:
Helps identify the variable within a project that presents the greatest forecasting risk
Sensitivity analysis:
Contingency Planning
Taking into account the managerial options implicit in a project
Tax Shield
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
Stand-Alone Principle
The assumption that evaluation of a project may be based on the project's incremental cash flows
Erosion
The cash flows of a new project that come at the expense of a firm's existing projects
Forecasting Risk
The possibility that errors in projected cash flows will lead to incorrect decisions
Capital Rationing
The situation that exists if a firm has positive NPV projects but cannot obtain the necessary financing
Hard Rationing
The situation that occurs when a business cannot raise financing for a project under any circumstances
Soft Rationing
The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting
Depreciation Tax Shield
The tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate
Recognizes that depreciation creates a cash inflow
The tax shield approach to computing the operating cash flow, given a tax paying firm:
Option to Expand
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?
Sunk Cost
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 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?
Lowest expected value for fixed costs
Which one of the following is a correct value to use if you are conducting a best case scenario analysis?
The firm will fund only those projects that will create value for the shareholders.
Which one of the following is correct when a firm faces hard rationing?
Stand-alone principle
Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?
Accelerated cost recovery system
Which one of the following refers to a method of increasing the rate at which an asset is depreciated?
Strategic Option
Which one of the following refers to an option to expand into related businesses in the future?
Erosion
Which one of the following terms is commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?
Opportunity Cost
Which one of the following terms refers to the best option that was forgone when a particular investment was selected?
Decrease in Fixed Costs
Which one of the following will increase the operating cash flow as computed using the tax shield approach?