Test 3

The possibility that errors in projected cash flows will lead to incorrct decisions is known as:

1. forecasting risk 2. estimation risk

The following is true relative to capital rationing:

1. hard rationing implies the firm is unable to raise funds for projects 2. soft rationing is typically internal in that the firm allocates funds to divisions for capital projects

Which of the following are reasons why NPV is considered a superior capital budgeting technique?

1. it considers the riskiness of the project. 2. it considers time value of money. 3. it considers all the cash flows. 4. it properly chooses among mutually exclusive projects (helps rank).

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

1. it determines the book value of assets which affects net salvage value 2. it determines taxes owed on fixed assets when they are sold 3. it affects a firm's annual tax liability

What are the two main drawbacks of sensitivity analysis?

1. it does not consider interaction among variable. 2. 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?

1. it reduces a false sense of security by giving a range of values for NPV instead of a single value 2. it identifies the variable that has the most effect on NPV.

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

1. managerial option 2. real option

Which of the following are components of project cash flow?

1. operating cash flow 2. capital spending 3. change in net working capital

A project has a positive NPV. What could drive this result?

1. overly optimistic management 2. the cash flow estimations are inaccurate 3. the project is a good investment

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

1. taxes are based on the difference between the book value and the sales price. 2. book value represents the purchase price minus the accumulated depreciation. 3. there will be a tax savings if the book value exceeds the sales price.

Which of the following qualify as managerial options?

1. the option to abandon 2. the option to wait 3. the option to expand

Which of the following are needed for cash flow estimation?

1. variable cost per unit 2. selling price per unit 3. unit sales per period

The stand-along principle assumes that evaluation of a project may be based on the project's _____ cash flows.

incremental

The difference between a firm's cash flows with a project versus without the project is called _____.

incremental cash flows

In a competitive market, positive NPV projects are:

uncommon

In order to analyze the risk of a project's NPV estimate, we should establish ____ for each important estimant variable.

upper and lower bounds

The first step in estimating cash flow is to determine the ____ cash flows.

relevant

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

- scenario analysis - asking what-if questions

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

1. IRR 2. NPV 3. payback period

The goals of risk analysis in capital budgeting include:

1. assessing the degree of financing risk 2. identifying critical components

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

1. beneficial spillover effects 2. erosion effects

Which of the following are considered relevant cash flows?

1. cash flows from erosion effects 2. cash flows from opportunity costs 3. cash flows from beneficial spillover effects

Investment in net working capital arises when ____.

1. cash is kept for unexpected expenditures 2. credit sales are made 3. inventory is purchased

Three main sources of cash flows over the life of a typical project:

1. cash outflows from investment in plant and equipment at the inception of the project. 2. net cash flows from sales and expenses over the life of the project. 3. net cash flows from salvage value at the end of the project.

Which of the following are fixed costs?

1. cost of equipment 2. rent on a production facility

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

1986 Tax Reform Act

Ch 09 - 3 True or False: For investor-owned businesses, a capital investment financial analysis identifies those projects that are expected to contribute to owner (shareholder) wealth. a. True b. False

A

Ch 10 - 9 True or False: Projects can be categorized by purpose including: mandatory replacement, discretionary replacement, expansion of new or existing services, environmental/safety projects and other. a. True b. False

A

Ch 14 - 3 True or False: Capital budgeting is the process of analyzing potential expenditures on fixed assets and deciding whether the firm should undertake those investments. a. True b. False

A

Ch 14 - 4 The most critical and the most difficult step in analyzing a project is estimating the _______________________ that the project will generate. a. incremental cash flows b. opportunity costs c. net present value d. payback period e. project scoring

A

Ch 14 - 8 True or False: Firms often use project scoring to subjectively incorporate a large measure of factors, including financial and non-financial, into the capital budgeting decision process. a. True b. False

A

Ch 09 - 10 The internal rate of return (IRR) of a capital investment: a. Changes when the cost of capital changes. b. Must exceed the project cost of capital to make the investment financially acceptable. c. Measures the dollar profitability of a project. d. Must be less than the project cost of capital to make the investment financially acceptable. e. Measures the length of time that it takes a business to recover its initial investment in the project.

B

Ch 09 - 9 True or False: Two years ago, you invested $1,000 in a healthcare stock. Your return during the first year was -50 percent, while your return in the second year was +50 percent. Your investment is now worth $1,000. a. True b. False

B

Ch 14 - 6 True or False: The net present social value (NPSV) formalizes the capital budgeting decision process for the for-profit firm. a. True b. False

B

Ch 14 - 7 True or False: The modified internal rate of return (MIRR) is a worse measure of a project's percentage rate of return than the internal rate of return (IRR). a. True b. False

B

Ch 16 - 4 True or False: A business's float is maximized by accelerating disbursements and slowing receipts. a. True b. False

B

Ch 14 - 1 Which of the following statements about capital investment project scoring is most correct? a. Project scoring combines the payback, NPV, and IRR values to create an all-encompassing measure of financial attractiveness. b. Project scoring is a technique that quantifies the social value of a project. c. Project scoring is a technique that considers both financial and non-financial factors. d. Project scoring assigns values to various diseases, and then ranks projects according to their effectiveness in treating patients with those diseases. e. Project scoring examines the facilities of an organization to determine whether or not the organization can support the project.

C

Ch 09 - 1 Which of the following statements about project classifications is most correct? a. Projects are classified by purpose, such as replacement projects. b. Projects are classified by size, such as less than $1 million. c. Projects are classified by life, such as less than 5 years. d. Both a. and b. above are correct. e. a., b., and c. above are correct.

D

Ch 09 - 8 As the discount rate applied to a single amount future value increases, the present value: a. stays the same. b. increases by some amount. c. doubles. d. decreases. e. There is not enough information to answer this question.

D

Ch 16 - 3 Which of the following techniques are used to monitor a business's receivables? a. Average collection period b. Aging schedule c. Collections budget d. Both a. and b. above e. a., b., and c. above

D

Ch 09 - 2 Which of the following are steps in a capital investment financial analysis? a. Estimate the project's cash flows b. Assess the project's riskiness c. Estimate the project cost of capital (discount rate) d. Measure the financial impact e. All of the above

E

Ch 09 - 4 Which of the following statements about payback (payback period) is most correct? a. Payback is a measure of time breakeven. b. Payback is a rough measure of risk. c. Payback is a rough measure of liquidity. d. Both a. and b. above are correct. e. a., b., and c. above are correct.

E

Ch 14 - 2 Which of the following statements about the Post Audit is most correct? a. The purpose of the post audit is to improve forecasts. b. The purpose of the post audit is to develop historical risk data. c. The purpose of the post audit is to improve operations. d. The purpose of the post audit is to reduce losses. e. All of the above

E

Ch 14 - 5 The most commonly used return on investment (ROI) measures are net present value and: a. inflation b. opportunity cost c. strategic value d. payback period e. internal rate of return

E

Ch 16 - 1 Which of the following statements best describes the revenue cycle? a. It focuses on cash management. b. It focuses on inventory management. c. It focuses on receivables management. d. It focuses on cash, inventory, and receivables management. e. It focuses on all activities associated with billing and collecting for services.

E

Ch 16 - 2 The revenue cycle is composed of: a. Before service activities b. At-service activities c. After-service activities d. Monitoring and reporting activities e. All of the above activities

E

Since depreciation is a non-cash expense, it does not affect a project's cash flows. True or False?

False

In the context of capital budgeting, what does sensitivity analysis do?

It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.

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.

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

True

Cash flows should always be considered on an ____ 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

The primary risk in estimation errors is the potential to _____.

delay the launch of a good project.

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

direct

Sunk costs are costs that ___.

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

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

ignored

Accounts receivable and accounts payable are included in project cash flow estimation as part of changes in ____.

net working capital

The difference between a firm's current assets and its current liabilities is known as the ____.

net working capital

Erosion will ____ the sales of existing products.

reduce

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 assessd the ____ of the cash flow estimates.

reliability