FINC 3210 CH 9
What is the total number of imputes that change while doing sensitivity analysis?
1
Side effects from investing in a project refer to cash flows from :
Beneficial spillover effects and erosion effects
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.
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.
Which of the following are components of project cash flow?
Change in net working capital, capital spending, and operating cash flow
Operating cash flow is a function of
Earnings before Interest and Taxed and Depreciation and Taxes
What are the two main drawbacks of sensitivity analysis?
It does not consider interaction among variables and It may increase the false sense of security among managers if all pessimistic estimates of NPV are positive
In the context of capital budgeting, what does sensitivity analysis do?
It examined how sensitive a particular NPV calculation is to changes in underlying assumptions
Once cash flows have been estimated, which of the following investment criteria can be applied to them?
NPV Payback Period and IRR
Which of the following techniques will provide the most consistently correct result?
Net Present Value
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
What is scenario analysis?
Scenario analysis determines the impact on NPV of a set of events relating to a specific scenario
What approach does the following formula describe?
The Tax Shield Approach
Cash flows used in project estimation should always reflect:
after-tax cash flows and cash flows when they occur
The goals of risk analysis in capital budgeting include:
assessing the degree of financing risk and identifying critical components
Opportunity costs are ______.
benefits lost due to taking on a particular project
Incremental cash flows come about as a(n) _____ consequence of taking a project under consideration
direct
We underestimate NPV because of the option(s) to _____
expand and abandon
we understand NPV because of the option(s) to____.
expand and abandon
Interest expenses incurred on debt financing are ____ when computing cash flows from a project.
ignored
Synergy will ___ the sales of existing products.
increase
The stand-alone principle assumes that evaluation of a project may be based on the project's ______ cash flows
incremental
The first step in estimating cash flow is to determine the ____ cash flows
relevant
The first step in estimating cash flow is to determine the _____ cash flows
relevant
Which of the following are fixed costs?
rent on a production facility and cost of equipment
When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs we are engaging in
scenario analysis and asking what-if questios
To investigate the impact on NPV of a change in one variable, you would employ ____.
sensitivity analysis
Capital rationing exists when a company has identified positive NPV projects but can't (or won't) find:
the necessary financing
In order to analyze the risk of a projects NPV estimate, we should establish ___ for each important estimate vatiable
upper and lower bonds
Which of the following are needed for cash flow estimation?
variable cost per unit, selling price per unit, and unit sales per period
Investment in net working capital arises when _____.
inventory is purchased and cash is kept for unexpected expenditures
What are the two main benefits of performing sensitivity analysis?
it identifies the variable that has the most effect on NPV and It reduces a false sense of security by giving a range of values for NPV instead of a single value
An option on a real asset rather than a financial asset is known as a
real option and managerial option
An option on a real asset rather than a financial asset is known as a:
real option and managerial option
Erosion will ____ the sales of existing products.
reduce
When Using _____, all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variavle
sensitivity analysis
According to the ____ principle, once the incremental cash flows from a project have been identified, the project can be viewed as "minifirm"
stand-alone
Operating cash flow is a function of:
taxes depreciation and earnings before interest and taxes
Which of the following is an example of a sunk cost
testing marketing expenses
True or False: While performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time
true
What is an important drawback of traditional NPV analysis
It ignores managerial options in investment decisions
Which of the following is true relative to capital rationing
Soft rationing is typically internal in that the firm allocates funds for capital projects. Hard rationing implies the firm is unable to raise funds for projects
Which of the following qualify as "managerial options"?
The option to abandon. The option to expand. The option to wait.
Which of the following qualify as "managerial options"
The option to wait the option to expand and the option to abandon
