Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline. 
B)  The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. 
C)  Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not. 
D)  Identifying an externality can never lead to an increase in the calculated NPV. 
E)  An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. 
A)  An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline. 
B)  The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. 
C)  Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not. 
D)  Identifying an externality can never lead to an increase in the calculated NPV. 
E)  An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality.

Question 2

Which of the following rules is CORRECT for capital budgeting analysis?

Accepted Answer

A)  Only incremental cash flows, which are the cash flows that would result if a project is accepted, are relevant when making accept/reject decisions. 
B)  Sunk costs are not included in the annual cash flows, but they must be deducted from the PV of the project's other costs when reaching the accept/reject decision. 
C)  A proposed project's estimated net income as determined by the firm's accountants, using generally accepted accounting principles (GAAP), is discounted at the WACC, and if the PV of this income stream exceeds the project's cost, the project should be accepted. 
D)  If a product is competitive with some of the firm's other products, this fact should be incorporated into the estimate of the relevant cash flows. However, if the new product is complementary to some of the firm's other products, this fact need not be reflected in the analysis. 
E)  The interest paid on funds borrowed to finance a project must be included in estimates of the project's cash flows. 
A)  Only incremental cash flows, which are the cash flows that would result if a project is accepted, are relevant when making accept/reject decisions. 
B)  Sunk costs are not included in the annual cash flows, but they must be deducted from the PV of the project's other costs when reaching the accept/reject decision. 
C)  A proposed project's estimated net income as determined by the firm's accountants, using generally accepted accounting principles (GAAP), is discounted at the WACC, and if the PV of this income stream exceeds the project's cost, the project should be accepted. 
D)  If a product is competitive with some of the firm's other products, this fact should be incorporated into the estimate of the relevant cash flows. However, if the new product is complementary to some of the firm's other products, this fact need not be reflected in the analysis. 
E)  The interest paid on funds borrowed to finance a project must be included in estimates of the project's cash flows.

Question 3

Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy This is especially true for large product development projects.

Accepted Answer

A) True 
 B)False

Question 4

Kasper Film Cois selling off some old equipment it no longer needs because its associated project has come to an end The equipment originally cost $22,500, of which 75% has been depreciated The firm can sell the used equipment today for $6,000, and its tax rate is 40% What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

Accepted Answer

A)  $5,558 
B)  $5,850 
C)  $6,143 
D)  $6,450 
E)  $6,772 
A)  $5,558 
B)  $5,850 
C)  $6,143 
D)  $6,450 
E)  $6,772

Question 5

Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. Thus, cannibalization is dealt with by society through the antitrust laws. 
B)  If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward. 
C)  If cannibalization is determined to exist, then this means that the calculated NPV if cannibalization is considered will be higher than the NPV if this effect is not recognized. 
D)  Cannibalization, as described in the text, is a type of externality that is not against the law, and any harm it causes is done to the firm itself. 
E)  If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. Thus, cannibalization is dealt with by society through the antitrust laws. 
A)  If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. Thus, cannibalization is dealt with by society through the antitrust laws. 
B)  If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward. 
C)  If cannibalization is determined to exist, then this means that the calculated NPV if cannibalization is considered will be higher than the NPV if this effect is not recognized. 
D)  Cannibalization, as described in the text, is a type of externality that is not against the law, and any harm it causes is done to the firm itself. 
E)  If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. Thus, cannibalization is dealt with by society through the antitrust laws.

Question 7

Sensitivity analysis measures a project's stand-alone risk by showing how much the project's NPV (or IRR) is affected by a small change in one of the input variables, say sales Other things held constant, with the size of the independent variable graphed on the horizontal axis and the NPV on the vertical axis, the steeper the graph of the relationship line, the more risky the project, other things held constant.

Accepted Answer

A) True 
 B)False

Question 8

two cardinal rules that financial analysts should follow to avoid capital budgeting errors are: (1) in the NPV equation, the numerator should use income calculated in accordance with generally accepted accounting principles, and (2) all incremental cash flows should be considered when making accept/reject decisions.

Accepted Answer

A) True 
 B)False

Question 9

debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

Accepted Answer

A) True 
 B)False

Which of the following statements is CORRECT?

Which of the following rules is CORRECT for capital budgeting analysis?

Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy This is especially true for large product development projects.

Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.

Which of the following statements is CORRECT?

debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

Overview

Risk and Return: Part I

Risk and Return: Part II

Bonds

Stocks

Financial Options

Financial Analysis

Forecasting

Cost of Capital

Corporate Valuation

Capital Budgeting

Real Options

Cap Structure

Cap Structure II

Dividends

Ipos, Invsmt Banking

Leasing

Hybrids

Working Capital

Derivatives

Bankruptcy, Reorganization, and Liquidation

Mergers

Filters

Exam 13: Cash Flows and Risk

Which of the following statements is CORRECT?

Which of the following rules is CORRECT for capital budgeting analysis?

Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy This is especially true for large product development projects.

Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.

Which of the following statements is CORRECT?

debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

Overview

Risk and Return: Part I

Risk and Return: Part II

Bonds

Stocks

Financial Options

Financial Analysis

Forecasting

Cost of Capital

Corporate Valuation

Capital Budgeting

Real Options

Cap Structure

Cap Structure II

Dividends

Ipos, Invsmt Banking

Leasing

Hybrids

Working Capital

Derivatives

Bankruptcy, Reorganization, and Liquidation

Mergers

Filters