According to the chapter, the value of an investment is determined by the magnitude and timing of the cash flows
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True Response Feedback; Actually it should include risk. The statement should be like this: The value of an investment is determined by the magnitude, timing, and risk of the cash flows.
Men tend to be more confident than womenTrueExpected cash flows are those that take place if all goes as plannedTruePsychological studies show that most people are under-confident about their abilities, but tend to be optimistic about the futureFalseBiased caused in hoped-for FCFs can be adjusted by adjusting the required discount rateTrue
Response Feedback;
If discount rate is increased the PV is reduced. P.23.Equity FCF equals firm or project cash flows plus net new debt minus after-tax interest paid to the firm s creditors minus dividends plus share repurchasesFalseFree cash flows equal the amount of cash left over after paying all expensesFalseAccording to the textbook the reason accounting income is different than cash flow is because accounting income is calculated using the accrual basis of accountingTrueIn calculating FCF in conventional capital budgeting (or valuation), interest expense is not deducted before calculating the firm s tax liabilityTrueA method used to forecast revenue for the type of products (a high-tech product) in the example in the textbook (Section 2.3 Comprehensive Example Forecasting... page 27) isDiffusionAccording to the textbook, changes in net working capital are part of capital expenditures (CAPEX)FalseOperating net working capital is calculated by subtracting operating current liabilities from operating current assetsFalseA project with a positive NPV and a positive IRR generates value for a companyTrue
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Project with a positive NPV will have an IRR higher than the cost of capital. Projects generate value when the NPV is positive and the IRR is higher than the cost of capital.When projects are mutually exclusive the IRR will provide the best metricFalseThere is just one NPV and one IRR when evaluating a projectFalseThe payback model (or payback period metric) has just one drawback. It doesn t account for the time value of moneyFalse
Response Feedback;
It has two drawbacks in addition to the one mentioned above, it ignores the value of cash flows received after the payback period and the cutoff is not tied to market conditions (it is arbitrary). One advantage of the payback period is that it can be used as a measure of risk. The sooner the investment is recovered, the lower the risk.The analysis of a freestanding division, like a distribution center, is very similar to valuing a stand-alone businessTrue
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In both cases PV of cash flows generated by the investment is compared to the cost of the investment.There are two steps in doing DCF analysis to evaluate investments. Step 1. forecast the amount and timing of the future cash flows. Step 2. Find the PV of the cash flowsFalse
