Chapter 9 Finance LS
Investment in NWC arises when:
-credit sales are made -inventory is purchased -cash is kept for unexpected expenditures
Which of the following are considered relevant cash flows?
Cash flows from beneficial spillover effects, from erosion effects when the sales would not otherwise be lost, from adverse spillover effects
Sunk cost?
Project consultation fee
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
NPV, IRR, and payback period
We underestimate NPV because of the option(s) to _____________.
abandon/expand
Incremental cash flows come about as a _____ consequence of taking a project under consideration.
direct
The primary risk in estimation errors is the potential to _____.
make incorrect capital budgeting decisions
Opportunity costs are classified as __________ costs in project analysis.
relevant (Opportunity costs are the costs of an alternative investment)
Which of the following are fixed costs?
rent on a production facility and cost of equipment
What approach does the following formula describe? OCF = (Sales - Costs) x (1-T) + Depreciation x T
The Tax Shield Approach
A manager has estimated a positive NPV for a project. What could drive this result?
The cash flow estimations are inaccurate, the project is a good investment, overly optimistic management
Which of the following quality as "managerial options"?
The option to wait, abandon, or expand
Side effects from investing in a project refer to cash flows from:
beneficial spillover effects and erosion effects
Opportunity costs are ________
benefits lost due to taking on a particular project
Most of the time the market value of a project:
cannot be observed
Cash flows used in project estimation should always reflect:
cash flows when they occur and after-tax cash flows
Components of project cash flow:
change in NWC, operating cash flow, capital spending
The possibility that errors in projected cash flows will lead to incorrect decisions is known as:
forecasting risk and estimation risk
Capital Rationing:
hard rationing implies the firm is unable to raise funds for projects and soft rationing is typically internal in that the firm allocates funds to divisions for capital projects
The difference between a firm's cash flows with a project versus without a project is called
incremental cash flows
Which of the following are components in project cash flow?
operating cash flow, capital spending, change in net working capital
An option on a real asset rather than a financial asset is known as a:
real option and managerial option
Erosion will ____ the sales of existing products.
reduce
One of the most important steps, and the first step, in estimating cash flow is to determine the ________ cash flows.
relevant
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
A company estimated cash flows for a project, evaluated those cash flows using NPV, and determined the project was acceptable. Unfortunately they lost money. This could have been avoided had they assessed the ___________ of the cash flow estimates.
reliability
Which of the following techniques will provide the most consistently correct result?
Net Present Value = king
T/F: The number of positive NPV projects is unlimited for any given firm.
False
Why MPV is the king capital budgeting technique?
It considers the riskiness of the project, it properly chooses among mutually exclusive projects, it considers TVM, it considers all the cash flows
What is an important drawback of traditional NPV analysis?
It ignores managerial options in investment decisions
