Question 1

What is the most important function of sensitivity analysis?

Accepted Answer

Sensitivity analysis shows how

Question 2

What are sunk costs?

Accepted Answer

Sunk costs are payments alread

Question 3

Which of the following is an example of cannibalization?

Accepted Answer

A)  A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. 
B)  A grocery store begins selling T-shirts featuring the local university's mascot. 
C)  A basketball manufacturer adds basketball hoops to its product line. 
D)  A convenience store begins selling pre-paid cell phones. 
A)  A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. 
B)  A grocery store begins selling T-shirts featuring the local university's mascot. 
C)  A basketball manufacturer adds basketball hoops to its product line. 
D)  A convenience store begins selling pre-paid cell phones.

Question 4

A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000. This in turn would cause inventory to increase by $125,000, accounts receivable to increase by $100,000, and accounts payable to increase by $90,000. What is the firm's expected change in net working capital?

Accepted Answer

A)  $1,735,000 
B)  $315,000 
C)  $225,000 
D)  $135,000 
A)  $1,735,000 
B)  $315,000 
C)  $225,000 
D)  $135,000

Question 5

An insurance office owns a large building downtown. The sixth floor of this building currently houses its entire Human Resources Department. After carrying out a survey to see whether the sixth floor could be rented and for what price, the company must decide whether to split the Human Resources Department between currently unoccupied spaces on several floors and rent out the entire sixth floor or to leave things as they currently are. Which of the following should NOT be considered when deciding whether to rent out the sixth floor?

Accepted Answer

A)  the amount obtained by renting the sixth floor 
B)  the cost of refurbishing the new space to be occupied by the Human Resources Department 
C)  cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces 
D)  the cost of the research into the feasibility of renting the sixth floor 
A)  the amount obtained by renting the sixth floor 
B)  the cost of refurbishing the new space to be occupied by the Human Resources Department 
C)  cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces 
D)  the cost of the research into the feasibility of renting the sixth floor

Question 6

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:   The free cash flow for the first year of Epiphany's project is closest to ________.

Accepted Answer

A)  $45,600 
B)  $28,500 
C)  $38,000 
D)  $53,200 
A)  $45,600 
B)  $28,500 
C)  $38,000 
D)  $53,200

Question 7

If a business owner is using the extra space at home for his business, does it imply a zero opportunity cost for the space?

Accepted Answer

As long as there is an alterna

Question 8

The difference between scenario analysis and sensitivity analysis is ________.

Accepted Answer

A)  scenario analysis is based upon the internal rate of return (IRR) and sensitivity analysis is based upon net present value (NPV) 
B)  only sensitivity analysis allows us to change estimated inputs of net present value (NPV) analysis 
C)  scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters 
D)  only scenario analysis breaks the net present value (NPV) calculation into its component assumptions 
A)  scenario analysis is based upon the internal rate of return (IRR) and sensitivity analysis is based upon net present value (NPV) 
B)  only sensitivity analysis allows us to change estimated inputs of net present value (NPV) analysis 
C)  scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters 
D)  only scenario analysis breaks the net present value (NPV) calculation into its component assumptions

Question 9

Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. The depreciation schedule shown is for three-year, straight-line depreciation. By how much would the net present value (NPV) of this project be increased, if the cars were depreciated by the MACRS schedule shown below given that the cost of capital is 10%?

Accepted Answer

A)  $7266 
B)  $9082 
C)  $10,898 
D)  $22,705 
A)  $7266 
B)  $9082 
C)  $10,898 
D)  $22,705

Question 10

Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of   million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 35% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year without the launch of the new SUV is closest to ________.

Accepted Answer

A)  $28.0 million 
B)  12.3 million 
C)  $40.3 million 
D)  $15.8 million 
A)  $28.0 million 
B)  12.3 million 
C)  $40.3 million 
D)  $15.8 million

Question 11

The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following would you NOT consider when making a capital budgeting decision?

Accepted Answer

A)  the additional taxes a firm would have to pay in the next year 
B)  the cost of a marketing study completed last year 
C)  the opportunity to lease out a warehouse instead of using it to house a new production line 
D)  the change in direct labor expense due to the purchase of a new machine 
A)  the additional taxes a firm would have to pay in the next year 
B)  the cost of a marketing study completed last year 
C)  the opportunity to lease out a warehouse instead of using it to house a new production line 
D)  the change in direct labor expense due to the purchase of a new machine

Question 13

The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.

Accepted Answer

A) True 
 B)False

Question 14

If available, should MACRS be preferred to straight-line depreciation?

Accepted Answer

Yes, MACRS should be preferred

Question 15

A real option is the obligation to take a particular business action.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following best defines incremental earnings?

Accepted Answer

A)  cash flows arising from a particular investment decision 
B)  the amount by which a firm's earnings are expected to change as a result of an investment decision 
C)  the earnings arising from all projects that a company plans to undertake in a fixed time span 
D)  the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision 
A)  cash flows arising from a particular investment decision 
B)  the amount by which a firm's earnings are expected to change as a result of an investment decision 
C)  the earnings arising from all projects that a company plans to undertake in a fixed time span 
D)  the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision

Question 17

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision. There are concerns of the sensitivity of this project to changes in the cost of capital. For what cost of capital does this project break-even?

Accepted Answer

A)  8% 
B)  10% 
C)  12% 
D)  14% 
A)  8% 
B)  10% 
C)  12% 
D)  14%

Question 18

A firm is considering a new project that will generate cash revenue of $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%?

Accepted Answer

A)  $374,625 
B)  $341,250 
C)  $416,250 
D)  $499,500 
A)  $374,625 
B)  $341,250 
C)  $416,250 
D)  $499,500

Question 19

Which of the following statements is FALSE?

Accepted Answer

A)  Many projects use a resource that the company already owns. 
B)  When evaluating a capital budgeting decision, we generally include interest expense. 
C)  Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. 
D)  As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings. 
A)  Many projects use a resource that the company already owns. 
B)  When evaluating a capital budgeting decision, we generally include interest expense. 
C)  Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. 
D)  As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

Question 20

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6 million to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to have a working life of six years. Which of these activities will be reported as an operating expense?

Accepted Answer

A)  the delivery and install cost only 
B)  the cost of the depositor only 
C)  the delivery and install cost and the cost of the depositor 
D)  None of these costs should be reported an an operating expense. 
A)  the delivery and install cost only 
B)  the cost of the depositor only 
C)  the delivery and install cost and the cost of the depositor 
D)  None of these costs should be reported an an operating expense.

What is the most important function of sensitivity analysis?

What are sunk costs?

Which of the following is an example of cannibalization?

If a business owner is using the extra space at home for his business, does it imply a zero opportunity cost for the space?

The difference between scenario analysis and sensitivity analysis is ________.

The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

Which of the following would you NOT consider when making a capital budgeting decision?

The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.

If available, should MACRS be preferred to straight-line depreciation?

A real option is the obligation to take a particular business action.

Which of the following best defines incremental earnings?

Which of the following statements is FALSE?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

Exam 9: Fundamentals of Capital Budgeting

What is the most important function of sensitivity analysis?

What are sunk costs?

Which of the following is an example of cannibalization?

If a business owner is using the extra space at home for his business, does it imply a zero opportunity cost for the space?

The difference between scenario analysis and sensitivity analysis is ________.

The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

Which of the following would you NOT consider when making a capital budgeting decision?

The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.

If available, should MACRS be preferred to straight-line depreciation?

A real option is the obligation to take a particular business action.

Which of the following best defines incremental earnings?

Which of the following statements is FALSE?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters