Ch 9 Smartbook

Which of the following are components of project cash flow? Multiple select question. operating cash flow capital spending change in fixed assets change in net working capital

operating cash flow capital spending change in net working capital

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

opportunity cost

Which of the following is an example of a sunk cost? Multiple choice question. project consultation fee salvage value of equipment project variable costs bonus to top management based on project success

project consultation fee

What is the total number of inputs that change at a given time while doing sensitivity analysis?

1

If a new project requires an investment in net working capital when it is launched, then at the end of the project, NWC will be:

100 percent reversed.

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

Direct

True or false: In calculating cash flows, you should consider all financing costs.

F

True or false: Operating cash flow is based on the salvage value of equipment.

F

True or false: The depreciation tax shield is the depreciation deduction divided by the tax rate.

F

Select all that apply Which of the following are reasons why NPV is considered a superior capital budgeting technique? Multiple select question. It considers all the cash flows. It considers time value of money. It properly chooses among mutually exclusive projects. It properly discounts earnings. It considers the riskiness of the project.

It considers all the cash flows. It considers time value of money. It properly chooses among mutually exclusive projects. It considers the riskiness of the project.

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

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

A positive NPV exists when the market value of a project exceeds its cost. Which of these two values is the most difficult to establish?

Market value

Which of the following is the equation for estimating operating cash flows using the tax-shield approach? OCF = (Sales − Costs) × (1 - Tax rate) OCF = (Sales − Costs) + Deprecation OCF = (Sales − Costs) × Tax rate + Depreciation × Tax rate OCF = (Sales - Costs) × (1 − Tax rate) + Depreciation × Tax rate

OCF = (Sales - Costs) × (1 − Tax rate) + Depreciation × Tax rate

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

Relevant

Opportunity costs are classified as ______ costs in project analysis.

Relevant

What is the difference between scenario analysis and sensitivity analysis?

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

What is scenario analysis?

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

The depreciation tax ____________is the tax savings that results from the depreciation deduction. (Enter only one word per blank.)

Shield

Which of the following is true relative to capital rationing? Multiple select question. Soft rationing is typically internal in that the firm allocates funds to divisions for capital projects. Hard rationing implies the firm is unable to raise funds for projects. Soft rationing cannot be overcome even if a superior project is found. Hard rationing is typically a decision made by top management.

Soft rationing is typically internal in that the firm allocates funds to divisions for capital projects. Hard rationing implies the firm is unable to raise funds for projects.

True or false: Investment in net working capital may arise from the need to cover credit sales.

T

True or false: Net working capital will be recovered at the end of a project.

T

True or false: 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.

T

Select all that apply A manager has estimated a positive NPV for a project. What could drive this result? Multiple select question. The project is a good investment. Overly optimistic management could drive this result. Management rationality could drive this result. The cash flow estimations are inaccurate.

The project is a good investment. Management rationality could drive this result. The cash flow estimations are inaccurate.

Cash flows should always be considered on a(n) ______ basis.

aftertax

Select all that apply When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in ______. Multiple select question. rocket science asking what-if questions fruitless endeavors scenario analysis

asking what-if questions scenario analysis

Select all that apply Side effects from investing in a project refer to cash flows from: opportunity costs. beneficial spillover effects. sunk costs. erosion effects.

beneficial spillover effects. erosion effects.

Opportunity costs are ______.

benefits lost due to taking on a particular project

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.

Which of the following are considered relevant cash flows? Multiple select question. cash flows from external costs cash flows from erosion effects cash flows from beneficial spillover effects cash flows from sunk costs

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

Select all that apply Cash flows used in project estimation should always reflect: Multiple select question. cash flows when they occur. aftertax cash flows. financing costs. accounting values.

cash flows when they occur. aftertax cash flows.

What is net working capital?

current assets minus current liabilities

Which of the following techniques will provide the most consistently correct result? net present value average accounting return payback internal rate of return

net present value

Sunk costs are costs that ______.

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

Interest expenses incurred on debt financing are ______ when computing cash flows from a project.

ignored

Synergy will ______ the sales of existing products.

increase

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

incremental

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

incremental cash flows

Select all that apply Investment in net working capital arises when ______. Multiple select question. inventory is purchased equipment is purchased using long-term debt credit sales are made cash is kept for unexpected expenditures

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

The project cash flow equals the project operating cash flow ___________________project change in NWC minus project capital spending. Listen to the complete question

minus

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

recovered

Erosion will ______ the sales of existing products.

reduce

The first step in estimating cash flow is to determine the ______ cash flows.

relevant

Which of the following is an example of an opportunity cost? Multiple choice question. rental income likely to be lost by using a vacant building for an upcoming project money spent on advertising to take advantage of opportunities in the market lowering taxes by increasing depreciation expenses

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

Select all that apply Estimates of which of the following are needed to prepare pro forma income statements? Multiple select question. competitor pricing historical trends selling price per unit unit sales variable costs

selling price per unit unit sales variable costs

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

sensitivity

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

sensitivity analysis

When using ______, all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable.

sensitivity analysis

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

stand-alone

Select all that apply Operating cash flow is a function of: Multiple select question. taxes. salvage value of equipment. depreciation. initial investment in equipment. earnings before interest and taxes.

taxes. depreciation. earnings before interest and taxes.

Capital rationing exists when a company has identified positive NPV projects but cannot (or will not) find ______.

the necessary financing

What approach does the following formula describe? OCF = (Sales − Costs) × (1 − TC) + Depreciation × TC

the tax-shield approach

Accounts receivable and accounts payable are included in project cash flow estimation as part of changes in ______.

net working capital

The difference between a firm's current assets and its current liabilities is known as the ______.

net working capital

Select all that apply Once cash flows have been estimated, which of the following investment criteria can be applied to them? Multiple select question. payback period the constant growth dividend discount model YTM NPV IRR

payback period NPV IRR