Business Finance Chapter 9 Learnsmart

What is an important drawback of traditional NPV analysis?

It ignores managerial options in investment decisions

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

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

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

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

Which of the following qualify as "managerial options"?

The option to wait; the option to expand; the option to abandon

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

Synergy will _____ the sales of existing products

increase

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 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

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

ignored

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

real option; managerial option

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 assesed the _____ of the cash flow estimates

reliabilitiy

Investment in net working capital arises when

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

Which of the following are needed for cash flow estimation?

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

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

beneficial spillover effects; erosion effects

Which of the following is an example of an opportunity cost?

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

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

The project is a good investment; overly optimistic management; the cash flow estimations are inaccurate

Which of the following is true relative to capital rationing?

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

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

It considers the riskiness of the project; it considers time value of money; it properly chooses among mutually exclusive projects; it considers all the cash flows

Which of the following are considered relevant cash flows?

cash flows from erosion effects; cash flows from opportunity costs; cash flows from beneficial spillover effects