CH 9

Given the following data, what is the operating cash flow? EBIT = $80 Depreciation = $20 Taxes = $30 a. $80 b. $20 c. $30 d. $70

$80+20-30=$70

What is the depreciation tax shield if EBIT is $600, depreciation is $1,800 and the tax rate is 30%?

1,800 * 0.30 = $540

The difference between a firm's cash flows with a project versus without the project is called (blank)

incremental cash flows

an option on a real asset rather than a financial asset is known as a a. managerial option b. tangible option c. forward option d. real option

managerial option and real option

Opportunity costs are classified as (blank) costs in project analysis a. intangible b. irrelevant c. sunk d. relevant

relevant

The first step in estimating cash flow is to determine the (blank) cash flows a. relevant b. operating c. specious

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

(t/f) net working capital will be recovered at the end of a project

true

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%, what is the "worst case" for variable cost per unit? a. $40 b. $55 c. $50 d. $45

$55

If a new project requires an investment in networking capital when it is launches, then at the end of the project NWC will be a. 100% reversed b. 50% reversed c. ignored d. charged against the project again

a. 100% reversed

to investigate the impact on NPV of a change in one variable, you would employ (blank)

sensitivity analysis

Cash flows should always be considered on a(n) (blank) basis a. zero-tax b. pre-tax c. before-tax d. after-tax

after-tax

Which of the following is true relative to capital rationing? a. hard rationing implies the firm is unable to raise capital funds for projects b. soft rationing is typically internal in that the firm allocates funds to divisions for capital projects c. soft rationing cannot be overcome even if a superior project is found d. hard rationing is typically a decision made by top management

a. hard rationing implies the firm is unable to raise capital funds for projects b. soft rationing is typically internal in that the firm allocates funds to divisions for capital projects

Accounts receivable and accounts payable are included in project cash flow estimation as part of changes in (blank) a. net working capital b. investor sentiment c. tax rates d. the cost of capital

a. net working capital

what are the two main benefits of performing sensitivity analysis? a. it makes it possible to make a correct decision every time b. it is easier to perform than conventional NPV analysis c. it identifies the variable that has the most effect on NPV d. it reduces a false sense of security by giving a range of values for NPV instead of a single value

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

Which of the following techniques will provide the most consistently correct result? a. AAR b. IRR c. Payback d. NPV

d. NPV

The rules for depreciating assets for tax purposes are based upon provisions in the

1986 Tax Reform Act

When er estimate the best-case, worst-case, and best-case cash flows and calculate the corresponding NPVs we are engaging in: a. asking what-if questions b. fruitless endeavors c. scenario analysis d. rocket analysis

a. asking what-if questions c. scenario analysis

Which of the following are considered relevant cash flows? a. cash flows from beneficial spillover effects b. cash flows from erosion effects c. cash flows from sunk costs d. cash flows from external costs

a. cash flows from beneficial spillover effects b. cash flows from erosion effect d. cash flows from external costs

incremental cash flows come about as a(n) (blank ) consequence of taking a project under consideration a. direct b. sporadic c. indirect

a. direct

Which of the following are fixed costs? a. rent on a production facility b/ net working capital c. inventory costs d. cost of equipment

a. rent on a production facility d. cost of equipment

Once cash flows have been estimated, which of the following investment criteria can be applied to them? a. YTM b. NPV c. payback period d. IRR e. the constant growth dividend discount model

b. NPV c. payback period d. IRR

The positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project a. is lower than its cost b. cannot be observed c. must be determined by the SEC d. is higher than its costs

b. cannot be observed

Operating cash flow is a function of a. salvage value of equipment b. earnings before interest and taxes c. initial investment in equipment d. depreciation e. taxes

b. earnings before interest and taxes d. depreciation e. taxes

The primary risk in estimation errors is the potential to a. make managers look bad b. make incorrect capital budgeting decisions c. delay the launch of a good project

b. make incorrect capital budgeting decisions

We underestimate NPV because of the option(s) to (blank) a. manage b. leverage c. abandon d. expand

c. abandon d. expand

Sunk costs are

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

An increase in depreciation expense with (blank) cash flows from operations a. decrease b. increase c. not affect

increase

Synergy will (blank) the sales of existing products a.decrease b. increase c. have no effect on

increase

What is scenario analysis?

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

(t/f) while performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time

true

The basic approach to evaluating cash flow and NPV estimates involves asking

what-if questions

Investment in net working capital arises when a. cash is kept for unexpected expenditures b. credit sales are made c. inventory is purchased d. equipment is purchased using long term debt

a. cash is kept for unexpected expenditures b. credit sales are made c. inventory is purchased

according to the (blank) principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm" a. stand-alone b. stand-and-deliver c. stand-with d. walk-alone

a. stand-alone

Which of the following qualify as "managerial options" a. the option to abandon b. the option to change the cost of capital c. the option to wait d. the option to expand

a. the option to abandon c. the option to wait d. the option to expand

If a firm's sales estimate used in its base case analysis is 1,000 units per year and they anticipate the upper and lower bounds to be +/- 15% what is the best case for units sold per year? a. 1,000 b. 850 c. 1,015 d. 1,150

d. 1,150

What is net working capital? a. current assets plus current liabilities b. current liabilities minus current assets c. total assets minus total liabilities d. current assets minus current liabilities

d. current assets minus current liabilities

What is an important drawback of traditional NPV analysis a. it ignores the impact of the discount rate b. it ignores the time value of money when computing the NPV c. standard software programs and calculators cannot compute NPV d. it ignores managerial options in investment decisions

d. it ignores managerial options in investment decisions

Identify the three main sources of cash flows over the life of a typical project a. cash outflows from investment in plant and equipment at the inception of the project b. test marketing expenses that have been classified as sunk costs c. net cash flows from sales and expenses over the life of the project d. net cash flows form salvage value at the end of the project

a. cash outflows from investment in plant and equipment at the inception of the project c. net cash flows from sales and expenses over the life of the project d. net cash flows form salvage value at the end of the project

Which of the following are components of project cash flow? a. change in net working capital b. operating cash flow c. change in fixed assets d. capital spending

a. change in net working capital b. operating cash flow d. capital spending

What are the two main drawbacks of sensitivity analysis? a. it does not consider interaction among variables b. it considers the effects of interactions among variables c. it is easy to compute d. it may increase the false sense of security among managers among managers if all pessimistic estimates of NPV are positive

a. it does not consider interaction among variables d. it may increase the false sense of security among managers among managers if all pessimistic estimates of NPV are positive

A manager has estimated a positive NPV for a project. What could drive this result? a. overly optimistic management b. the cash flow estimations are inaccurate c. the project is a good investment d. management rationality

a. overly optimistic management b. the cash flow estimations are inaccurate c. the project is a good investment

West corporation estimated cash flows for a project, evaluate dthose cash flows using NPV, and determined that the project was acceptable. Unfortunately West Corporation lost money on the project. This may have been avoided had they assumed the (blank) cash flow estimates a. reliability b. fungibility c. additiveity d. principality

a. reliability

Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset? a. taxes are based on the difference between the book value and the sales price b. taxes are based on the difference between the purchase price and sales price of the asset c. there will be a tax savings if the book value exceeds the sales price d. book value represents the purchase price minus accumulated depreciated

a. taxes are based on the difference between the book value and the sales price c. there will be a tax savings if the book value exceeds the sales price d. book value represents the purchase price minus accumulated depreciated

In a competitive market, positive NPV projects are a. uncommon b. easy to find c. unlimited

a. uncommon

In order to analyze the risk of a project's NPV estimate, we should etablish (blank) for each important estimate variable a. upper and lower bounds b. average values c. maximum and minimum values d. most likely and lease likely values

a. upper and lower bounds

Which of the following are needed for cash flow estimation? a. variable cost per unit b. fixed cost per unit c. unit sales per period d. selling price per unit

a. variable cost per unit c. unit sales per period d. selling price per unit

The goals of risk analysis in capital budgeting include a. zeroing in on the correct NPV b. determining the correct discount rate c. assessing the degree of financing risk d. identifying critical components

c. assessing the degree of financing risk d. identifying critical components

Side effects from investing in project refer to cash flows from a. sunk costs b. opportunity costs c. erosion effects d. beneficial spillover effects

c. erosion effects d. beneficial spillover effects

What approach does the following formula describe? OCF=(Sales-costs) X (1-T) + depreciation X T A. the depreciation approach b. the sales and cost approach c. tax shield approach d. depreciation shield approach

c. tax shield approach

Capital rationing exists when a company has identified positive NPV projects but can't (or won't) find a. irreducible equations b. positive IRRs c. the necessary financing d. negative cash flows

c. the necessary financing

Among the three main sources of cash flow, which source of cash flow is the most important and also the most difficult to forecast? a. the costs incurred at the inception of the project b. the salvage value of the project c. the sunk costs incurred before the inception of the project d. the operating cash flows from net sales over the life of the project

d. the operating cash flows from net sales over the life of the project