Fin CHP 9
The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased 8 years ago for $689,000. Over the past 8 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
Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?
Erosion
Which of the following should be included in the analysis of a proposed investment?
Erosion, opportunity costs, side effects
The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation?
Hard rationing
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?
Incremental cash flows
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 fender
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
Opportunity cost
Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement?
Option to expand
Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting?
Sensitivity analysis
Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process?
Soft rationing
Which one of the following refers to the option to expand into related businesses in the future?
Strategic option
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, option to increase production beyond that initially projected
Scenario Analysis
helps determine the reasonable range of expectations for a project's anticipated outcome.
Sensitivity Analysis
helps identify the variable within a project that presents the greatest forecasting risk.
Ignoring the option to wait:
may underestimate the net present value of a project.
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?
sunk
