Finance Chapter 9 Concept Questions

Which of the following have the potential to increase the net present value of a proposed investment?

Ability to immediately shut down a project should the project become unprofitable Ability to wait until the economy improves before making the investment option to place the investment on hold until a more favorable discount rate becomes available, and Option to increase production beyond that initially projected

Lakeside Rides is adding a new roller coaster to its amusement park. The firm expects this addition to increase its overall ticket sales and increase attendance at its park. In particular, the firm expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster

Change in ticket sales for the existing coast, Change in ticket sales for the boat ride, and Change in food and beverage sales

Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years Money spent last month repairing a damaged front fenderThe managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased eight years ago for $689,000. Over the past eight years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $898,000. The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated present value of the future income from this centre is $2.9 million. Which one of the following defines the opportunity cost of the remodeling project

Current market value of the building

A pro forma financial statement is?

FS that projects future years' operations

The Shoe Box is considering adding a new line of footwear to product lineup. Which are relevant cash flows?

I, II, IV: Decreased revenue from products currently being offered if this new footwear is added to the lineup Revenue from the new line of footwear Cost of new counters to display the new line of footwear

Steve owns a store that caters primarily to men and their hobbies. He is contemplating greatly expanding the hunting and fishing section of the store. If he does this, he expects his fishing and hunting sales will increase, his camping gear sales will increase, and his model train sales will decrease. Which of the following should Steve include in his revenue projection for the expansion project

Increase in fishing and hunting sales Increase in camping gear sale and Decrease in model train sales

Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product

Molds needed to form the serving trays Projected increase in plate and silverware sales if the trays are produced Raw materials used in the production of the serving trays I, II, and IV only

Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, needs modernized. He is trying to decide whether to accept an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what opportunity cost, if any, should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.

The opportunity cost is the value of the current offer to buy the restaurant

Which refers to method of increasing rate at which an asset is depreciated?

accelerated cost recovery system

Kyle Electric has three positive NPV opportunities. Firm cannot finance any of them. Which describes this?

capital rationing

A proposed project will increase a firm's account payables, this increase is generally a?

cash inflow at time zero and outflow at end

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

current market value

Which will increase OCF using tax shield approach?

decrease in fixed costs

Tax shield approach to computing OCF, given a tax paying firm recognizes?

depreciation creates a cash inflow

The amount by which a firm's tax bill is reduced as a result of depreciation expense is?

depreciation tax shield

Scenario analysis best described as?

determination of reasonable range of project outcomes

Nu Tek is comprised of four separate divisions. For this year, the firm has allocated capital funds using soft rationing. Which of the following applies to this situation?

division managers will vie with each other for additional capital allocations

Which is most commonly used to describe cash flows of a new project that are simply an offset of reduced cash flows for current project?

erosion

The operating cash flows should include?

erosion effects

Which should be included in analysis of proposed investment?

erosion effects, opportunity costs, and side effects

Accelerated cost recovery system decreases?

estimation risk

Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts department, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should Isabella accept

exclusive gifts only

Which one of the following statements is correct when a firm faces hard rationing?

firm does not have funds to finance any new projects

Which should be included when making pro forma statements?

forecasted sales, start up costs, aftertax salvage value, changes in NWC

Blackwell group is unable to obtain financing for any new projects. What term best applies?

hard rationing

Which are cash inflows from NWC?

increase in Account payable, decrease in accounts receivable

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

incremental cash flows

Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the operating cash flow of Firm A

less than firm B for year 2

Which is correct value to use if you are conducting best case scenario analysis?

lowest expected value for fixed costs

Opportunities that a manager has to modify project once it has started are called?

managerial options

Contingency planning focuses on?

managerial options implicit in a project

Which is best option that was foregone when a investment is selected?

opportunity cost

Turner Industries started a new project 3 months ago. Sales arising from project are exceeding all expectations. Given this, which one of the following is management most apt to implement?

option to expand

Scenario analysis helps determine?

reasonable range of expectations for a project's anticipated outcome

NWC invested is generally?

recouped at end of project

Jamie is analyzing estimated NPV of project under various scenarios. The type of analysis she is doing is?

scenario analysis

Mark is analyzing a project to determine how changes in variable cost per unit would affect the NPV. This is?

sensitivity analysis

Marcos Enterprises has 3 divisions. Firm allocates 1.5 mill per year for capital purchases. Which describes this?

soft rationing

Which principle refers to assumption that a project will be evaluated based on its incremental cash flows?

stand alone principle

Which refers to option to expand into related businesses in future?

strategic options

A cost that should be ignored when evaluating a project because it has already been incurred and cannot be recouped is?

sunk cost

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Weston can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost

sunk cost

Assume a firm has positive net earnings. The OCF of this firm increases when?

tax rate decreases

The ability to delay an investment is valuable provided?

there are conditions under which the investment will have a positive NPV

ignoring option to wait may?

underestimate NPV

sensitivity analysis helps identify?

variable within a project that presents greatest forecasting risk