FIN 320 - CH 9

which of the following qualify as "managerial options"?

- the option to abandon -the option to wait -the option to expand

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

-it determines taxes owed on fixed assets when they are sold -it determined the book value of assets which affects net salvage value -it affects a firms 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 n underlying assumptions

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

NPV

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

managerial option real option

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

relevant

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

sensitivity analysis

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

-it considers all the cash flows it considers the riskiness of the project it considers time value of money it properly choose among mutually exclusive projects

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

-overly optimistic management -the project is a good investment -the cash flow estimation are inaccurate

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

which of the following are needed for cash flow estimation?

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

Which of the following are considered relevant cash flows?

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

erosion will ___ the sales of existing product

reduce

Cash flows used in project estimation should always reflect:

after tax cash flows cash flows when they occur

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

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

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

incremental cash flows

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

-IRR -NPV -payback period

T/F: While performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time

True

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

after tax