Principles of Finance Chapter 9

incremental

The stand-alone principle assumes that evaluation of a project may be based on the project's ______ cash flows.

sensitivty analysis

To investigate the impact on NPV of a change in one variable, you would employ ______.

stand-alone

According to the ______ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm."

$400,000

Broadband, Inc., has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $400,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of Blank______ as the base case.

reduce

Erosion will ______ the sales of existing products.

variable costs, unit sales, selling price per unit

Estimates of which of the following are needed to prepare pro forma income statements?

incremental cash flow

The difference between a firm's cash flows with a project versus without the project is called ______.

False

Fixed costs cannot be changed over the life of the investment.

recouped

Given a level of investment in net working capital, that same investment must be __________ at some time in the future.

$55; 1.10 × $50 = $55; the worst case for costs is the higher value.

If a firm's variable cost per unit estimate used in its base-case analysis is $50 per unit and they anticipate the upper and lower bounds to be ± 10 percent, what is the "worst case" for variable cost per unit?

upper and lower bounds

In order to analyze the risk of a project's NPV estimate, we should establish ______ for each important estimate variable.

It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.

In the context of capital budgeting, what does sensitivity analysis do?

direct

Incremental cash flows come about as a(n) _____ consequence of taking a project under consideration.

credit sales are made, cash is kept for unexpected expenditures, inventory is purchased

Investment in net working capital arises when ______.

true

Investment in net working capital may arise from the need to cover credit sales.

true

Net working capital will be recovered at the end of a project.

opportunity cost

The most valuable alternative that is given up if an investment is undertaken is called what?

IRR, payback period, NPV

Once cash flows have been estimated, which of the following investment criteria can be applied to them?

relevant

One of the most important steps in estimating cash flow is to determine the ______ cash flows.

depreciation, taxes, earnings before interest and taxes

Operating cash flow is a function of _________.

false

Operating cash flow is based on the salvage value of equipment.

benefits lost due to taking on a particular project

Opportunity costs are ______.

Sensitivity

Scenario analysis considers a combination of factors for each scenario, while ________analysis focuses on only one variable at a time.

beneficial spillover effects, erosion effects.

Side effects from investing in a project refer to cash flows from:

have already occurred and are not affected by accepting or rejecting a project

Sunk costs are costs that ______.

increase

Synergy will ______ the sales of existing products.

It reduces a false sense of security by giving a range of values for NPV instead of a single value, It identifies the variable that has the most effect on NPV.

What are the two main benefits of performing sensitivity analysis?

Scenario analysis determines the impact on NPV of a set of events relating to a specific scenario.

What is scenario analysis?

scenario analysis, asking what-if questions

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

capital spending, change in net working capital, operating cash flow

Which of the following are components of project cash flow?

cash flows from beneficial spillover effects, cash flows from external costs, cash flows from erosion effects

Which of the following are considered relevant cash flows?

cash flows from erosion effects, cash flows from external costs, cash flows from beneficial spillover effects

Which of the following are considered relevant cash flows?

cost of equipment, rent on a production facility

Which of the following are fixed costs?

Project Consultant Fees

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

rental income likely to be lost by using a vacant building for an upcoming project

Which of the following is an example of an opportunity cost?

NPV

Which of the following techniques will provide the most consistently correct result?