Fin Mgmt Ch 9

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

$540

If a firm's sales estimate used in its best 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?

1,150

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% reversed

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

1986 Tax-reform act

What are the two main drawbacks of sensitivity analysis?

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

What are the two main benefits of performing sensitivity analysis?

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

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

NPV Payback period IRR

Which of the following is an example of opportunity cost?

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

What is the difference between scenario and sensitivity analysis?

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

A manager has estimated a positive NPV for a project. What could drive this result?2

The cash flow estimations are inaccurate. The project is a good investment. Overly optimistic Management

We underestimate NPV because of the option to ___.

abandon expand

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

after-tax

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 components of project cash flow?

capital spending change in net working capital operating cash flow

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

erosion effects beneficial spillover effects

The possibility that error in projected cash flows will lead to incorrect decisions is known as:

estimation risk forecasting risk

Sunk costs are costs that ___.

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

an option on a real asset rather than a financial asset is known as a :

real option managerial option

Operating cash flow is a function of:

taxes depreciation earnings before interest and taxes

Capital rationing exists when a company has identified positive NPV projects but can't (or won't) find:

the necessary financing

True or False: While performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time.

true

In a competitive market, positive NPV projects are:

uncommon

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

what-if questions

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

true

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 ___ as the base case.

$400,000

If a firms 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?

$55

If a firm's current assets are $150,000, its total assets are $320,000, and its current liabilities are $80,000, what is its net working capital?

$70,000

Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?

Book value represents the purchase price minus the accumulated depreciation. There will be a tax savings if the book value exceeds the sales price. Taxes are based on the difference between the book value and the sales price.

Which of the following are considered relevant cash flows?

Cash flows from beneficial spillover effects. Cash flows from external costs. Cash flows from erosion effects

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

ignored

An increase in depreciation expense will ___ cash flows from operations.

increase

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

Investments in net working capital arises when ___.

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

Though depreciation is a non-cash expense, it is important to capital budgeting for these reason:

it determines taxed owed on fixed assets when they are sold. It determines the book value of assets which affects net salvage value. it affects a firm's annual tax liability

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

relevant

West Corporation estimated cash flows for a project, evaluated those 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 assessed the ___ of the cash flow estimates.

reliability

Which of the following are needed for cash flow estimation?

selling price per unit unit sales per period variable cost per unit

When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPV's, we are engaging in:

asking what-if questions scenario analysis

Which of the following are fixed costs?

cost of equipment rent on a production facility

Incremental cash flows come about as a ___ consequence of taking a project under consideration.

direct

What is an important drawback of traditional NPV analysis?

It ignores managerial options in investment decisions.

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

Net Present Value

Identify the three main sources of cash flows over the life of a typical project.

Net cash flows from sales and expenses over the life of the project. Net cash flows from salvage value at the end of the project. Cash outflows from investment in plant and equipment at the inception of the project.

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

Sensitivity analysis

What approach does the following formula describe: OCF = (sales - costs) x (1 - T) + Depreciation x T

The tax shield approach