FIN 320 - Exam 3

The average net income of a project divided by the project's average book value is referred to as the project's:

Average accounting return

The net present value of an investment represents the difference between the investment's:

Cost and its present value

The internal rate of return is the:

Discount rate that results in a zero net present value for the project

Net present value involves discounting an investment's:

Future cash flows

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:

Incremental cash flows

A pro forma financial statement is a financial statement that:

Projects future years' operating results

Jamie is analyzing the estimated net present value of a project under various conditions by adjusting the sales quantity, sales price, and the cost estimate all at the same time. The type of analysis Jamie is doing is best described as:

Scenario analysis

Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted?

Sensitivity analysis

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 a:

Sunk cost

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 project for the cost of the land?

The current market value of the land

The modified internal rate of return is specifically designed to address the problems associated with:

Unconventional cash flows

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? a) Erosion b) Sunk cost c) Replicated flows d) Opportunity cost e) Pirated flows

a) Erosion

Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? a) Mutually exclusive b) Conventional c) Dual return d) Crosswise e) Multiple choice

a) Mutually exclusive

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? a) Stand-alone principle b) Erosion principle c) Fallacy principle d) Base assumption principle e) Forecast assumption principle

a) Stand-alone principle

Which one of the following indicates that a project is expected to create value for its owners? a) Internal rate of return that is less than the requirement b) Positive net present value c) Profitability index less than 1.0 d) Positive average accounting rate of return e) Payback period greater than the requirement

b) Positive net present value

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which of the following? a) The initial cash flow is negative b) The investment is mutually exclusive with another investment of a different size c) One of the time periods within the investment period has a cash flow equal to zero d) The cash flows are conventional e) The investment has cash inflows that occur after the required payback period

b) The investment is mutually exclusive with another investment of a different size

Which one of the following terms refers to the best option that was foregone when a particular investment is selected? a) Erosion b) Sunk cost c) Marginal cost d) Side effect e) Opportunity cost

e) Opportunity cost

Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. a) Average accounting return that exceeds the requirement b) Payback period that is shorter than the requirement period c) Internal rate of return that exceeds the required return d) Positive net present value e) Profitability less than 1.0

e) Profitability index less than 1.0

The profitability index reflects the value created per dollar:

invested

Scenario analysis is best described as the determination of the:

reasonable range of project outcomes