45 terms

Chapter 9

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Incremental cash flows come about as a(n) ____ consequence of taking a project under consideration
- Direct
Once cash flows have been estimated, which of the following investments criteria can be applied to them?
- Payback period
- IRR
- NPV
Cash flows should always be considered on a(n) ____ basis
- After-tax
When we estimate the best-case, worse-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in:
- Asking-what-if question
- Scenario analysis
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
An option on a real asset rather than a financial asset is known as a:
- Real option
- Managerial option
One of the most important steps in estimating cash flow is to determine the ____ cash flows
- Relevant
Though depreciation is a non-cash expense, it is important to capital budgeting or these reasons:
- It affect a firm's annual tax liability
- It determines the book value of assets which affects net salvage value
- It determines taxes owed on fixed assets when they are sold
When using ____, all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to change in that particular variable.
- Sensitivity analysis
Which of the following are components of project cash flow?
- Operating cash flow
- Capital spending
- Change in net working capital
The possibility that errors in projected cash flows will lead to incorrect decisions is known as:
- Estimation risk
- Forecasting risk
Managerial options
- The option to wait
- The option to expand
- The option to abandon
If a firm's variable cost per unit estimate used in its base case analysis I $50 per unit and they anticipate the upper and lower bounds to be +/- 10%, what is the worst case for variable cost per unit?
- 1.10 * 50 = $55; the worse case for costs is the higher value
Opportunity costs are?
- Benefits lost due to taking on a particular project
Sunk costs are costs that ____
- Have already occurred and are not affected by accepting or rejecting a project
Which of the following are considered relevant cash flows?
- Cash flows from opportunity costs
- Cash flows from erosion effects
- Cash flows from beneficial spillover effects
The basic approach to evaluating cash flow and NPV estimates involves asking:
- What-if questions
Reasons why NPV is considered a superior capital budgeting technique?
- It considers time value of money
- It properly chooses among mutually exclusive projects
- It considers all the cash flows
Erosion will ____ the sales of existing products
- Reduce
Which of the following are needed for cash flow estimation?
- Unit sales per period
- Variable cost per unit
- Selling price per unit
According to the ____ principle, once the incremental cash flows from a project have been identified, the project can be viewed as a "minifirm"
- Stand-alone
Identify the three main sources of cash flows over the life of a typical project
- Net cash flows sales and expenses over the life of the project
- Net cash flows from salvage value at the end of the project
- Cash outflows from investment in plant and equipment at the inception of the project
Which of the following is true relative to capital rationing?
- Soft rationings 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
Accounts receivable and accounts payable are included in project cash flow estimation as part of changes in ____
- Net working capital
What is the key question to ask concerning a project that results in a positive NPV?
- What is he underlying source of value?
Which of the following are fixed costs?
- Rent on a production facility
- Cost of equipment
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
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
What approach does the following formula describe? OCF=(Sales-Costs) x (1-T) + Depreciation x T
- The Tax Shied Approach
The primary risk in estimation errors is the potential to___
- Make incorrect capital budgeting decisions
In a competitive market, positive NPV projects are:
- Uncommon
What are the two main benefits of performing sensitivity analysis?
- It reduces a false sense of security by giving a range of values for NPV instead of a single value
- It identifies the variable that has the most effect on NPV
what are the two main drawbacks of sensitivity analysis?
- It may increase the false sense of security among managers if all pessimistic estimates of NVP are positive
- It does not consider interaction among variables.
Investment in net working capital arises when____
- Credit sales are made
- Inventory is purchased
- Cash is kept for unexpected expenditures
Interest expenses incurred on dent financing are ___ when computing cash flows from a project
- Ignore
Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?
- Taxes are based on the difference between the book value and the sales price
- There will be a tax savings if the book value exceeds the sales price
- Book value represents the purchase price minus the accumulated depreciation
The difference between a firm's current assets and its current liabilities is known as the ___
- Net working capital
An increase in depreciation expense will____ cash flows from operation
- Increase
What is the depreciation tax shield if EBIT is $600, depreciation is $1800, and the tax rate is 30% ?
- 1800*1.30= $540
What is an important drawback of traditional NPV analysis
- It ignores managerial options in investment decisions
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
Capital rationing exists when a company has identified positive NPV projects but can't (or won't) find:
;
- The necessary financing
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 the time
What are the two main benefit of performing sensitivity analysis?
- It reduces a false sense of security by giving a range of values for NPV instead of a single value
- It identifies the variable that has the most effect on NPV
which of the following correctly describes the relationship between depreciation, income, taxes, and investment cash flows?
- As depreciation expense increases, net income and taxes will decrease, while investment cash flows will increase