Business Finance test 2 chapter 9

Any changes to a firm’s projected future cash flows that are caused by adding a new project are referred to as:A- eroded cash flows.B- deviated projections.C- incremental cash flows.D- directly impacted flows.E- opportunity cash flows. C- incremental cash flows.
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n):A- fixed cost.B- forgotten cost.C- variable cost.D- opportunity cost.E- sunk cost. E- sunk cost
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?A- Side effectB- ErosionC- Sunk costD- Opportunity costE- Marginal cost D- Opportunity cost
The amount by which a firm’s tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:A- tax shield.B- credit.C- erosion.D- opportunity cost.E- adjustment. A- tax shield
Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as:A- sensitivity analysis.B- erosion planning.C- scenario analysis.D- benefit planning.E- opportunity evaluation C- scenario analysis.
Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project’s net present value. What type of analysis is being conducted?A- Sensitivity analysisB- Erosion planningC- Scenario analysisD- Benefit-cost analysisE- Opportunity cost analysis A- Sensitivity analysis
The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of:A- any expected changes in the sales levels of current products caused by adding the new product line.B- cost of new display counters for the additional winter footwear.C- increased taxes from winter footwear profits.D- the research and development costs to produce the current winter footwear samples.E- the expected revenue from winter footwear sales. D- the research and development costs to produce the current winter footwear samples.
Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. All of the following are relevant costs to this project with the exception of: A- the cost of additional utilities required to operate the serving tray production operation.B- any change in the expected sales of plates and silverware gained from offering trays also.C- a percentage of the current operating overhead.D- the additional plastic raw materials that would be required.E- the cost to acquire the forms needed to mold the trays. C- a percentage of the current operating overhead.
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?A- The sum of the cash paid to date for both the lot and the improvementsB- The original purchase price onlyC- The current market value of the land plus the cash paid for the improvementsD- The current market value of the landE- Zero because the land and the improvements were previously purchased with cash D- The current market value of the land
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?A- ErosionB- BookC- SunkD- MarketE- Opportunity C- Sunk
CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?A- Present value of the future incomeB- Cost of the remodelingC- Current market value of the buildingD- Initial cost of the building plus the remodeling costsE- Current market value of the building plus the remodeling costs C- Current market value of the building
Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, originally cost $1.8 million, is currently fully paid for, but needs modernized. Bruce is trying to decide whether to accept an offer and sell Beef and More, as is, for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause an aftertax net loss of $90,000 in today’s dollars. The estimated present value of the cash inflows from the renovated restaurant is $3.2 million. When analyzing the renovation project, what cost, if any, should be included for the current restaurant?A- $0B- $1.1 millionC- $1.1 million + $90,000D- $1.8 million + 1.3 million + 90,000E- $3.2 million -($1.8 million + 1.3 million + 90,000) B- $1.1 million
Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost:A- of the property insurance premium increase.B- of the exterior landscaping that will be required once the expansion is complete.C- of the additional sales person that will be required.D- of the inventory required to fill the additional retail space.E- of the blueprints that have been drawn of the expansion area. E- of the blueprints that have been drawn of the expansion area.
Thrill Rides is considering adding a new roller coaster to its amusement park. The addition is expected to increase its overall ticket sales. In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. All of the following are side effects associated with the new roller coaster with the exception of the: A-increased food sales.B- additional sales for the existing coaster.C- increased food costs.D- reduced sales for the boat ride.E- ticket sales for the new coaster. E- ticket sales for the new coaster.
The analysis of a new project should exclude:A- tax effects.B- erosion effects.C- side effects.D- sunk costs.E- opportunity costs. D- sunk costs.
The net working capital invested in a project is generally:A- a sunk cost.B- an opportunity cost.C- recouped in the first year of the project.D- recouped at the end of the project.E- depreciated to a zero balance over the life of the project. D- recouped at the end of the project.
A proposed project will increase a firm’s accounts payables. This increase is generally:A- treated as an erosion cost.B- treated as an opportunity cost.C- a sunk cost and should be ignored.D- a cash outflow at Time zero and a cash inflow at the end of the project.E- a cash inflow at Time zero and a cash outflow at the end of the project. E- a cash inflow at Time zero and a cash outflow at the end of the project.
Which of the following create cash inflows from net working capital? A- Decrease in accounts payable and increase in accounts receivableB- Decrease in both accounts receivable and accounts payableC- Increase in accounts payable and decrease in inventoryD- Increase in both accounts receivable and inventoryE- Increase in inventory and decrease in cash C- Increase in accounts payable and decrease in inventory
The pro forma income statements for a proposed investment should include all of the following except: A- fixed costs.B- forecasted sales.C- depreciation expense.D- taxes.E- changes in net working capital. E- changes in net working capital.
Assume an all-equity firm has positive net earnings. The operating cash flow of this firm:A- ignores both depreciation and taxes.B- is unaffected by the depreciation expense.C- must be negative.D- increases when the tax rate decreases.E- is equal to net income minus depreciation. D- increases when the tax rate decreases.
The tax shield approach to computing the operating cash flow, given a tax-paying firm:A- ignores both interest expense and taxes.B- separates cash inflows from cash outflows.C- considers the changes in net working capital resulting from a new project.D- ignores all noncash expenses and their effects.E- recognizes that depreciation creates a cash inflow. E- recognizes that depreciation creates a cash inflow.
Which one of the following will increase the operating cash flow as computed using the tax shield approach?A- Decrease in depreciationB- Decrease in salesC- Increase in variable costsD- Decrease in fixed costsE- Increase in the tax rate D- Decrease in fixed costs
Scenario analysis is best described as the determination of the:A- most likely outcome for a project.B- reasonable range of project outcomes.C- variable that has the greatest effect on a project’s outcome.D- effect that a project’s initial cost has on the project’s net present value.E- change in a project’s net present value given a stated change in projected sales. B- reasonable range of project outcomes.
Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?A- Sales price that is most likely to occurB- Lowest expected level of sales quantityC- Lowest expected salvage valueD- Highest expected need for net working capitalE- Lowest expected value for fixed costs E- Lowest expected value for fixed costs
Scenario analysis asks questions such as:A- How will changing the number of units sold affect the outcome of this project?B- What is the best outcome that should reasonably be expected?C- How much will a $1 increase in the variable cost per unit change the net present value?D- Will the net present value increase or decrease if the quantity sold increases by 100 units?E- How will the operating cash flow change if the depreciation method is changed? B- What is the best outcome that should reasonably be expected?
Scenario analysis:A- determines the impact a $1 change in sales has on a project’s internal rate of return.B- determines which variable has the greatest impact on a project’s net present value.C- helps determine the reasonable range of expectations for a project’s anticipated outcome.D- evaluates a project’s net present value while sensitivity analysis evaluates a project’s internal rate of return.E- determines the absolute worst and absolute best outcome that could ever occur. C- helps determine the reasonable range of expectations for a project’s anticipated outcome.
Sensitivity analysis:A- looks at the most reasonably optimistic and pessimistic results for a project.B- helps identify the variable within a project that presents the greatest forecasting risk.C- is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional.D- is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable.E- illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project. B- helps identify the variable within a project that presents the greatest forecasting risk.
The Green Tomato purchased a parcel of land six years ago for $389,900. At that time, the firm invested $128,000 grading the site so that it would be usable. Since the firm wasn’t ready to use the site itself at that time, it decided to lease the land for $48,000 a year. The Green Tomato is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $415,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land?A- $0B- $389,900C- $415,000D- $229,000E- $101,900 C- $415,000

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