| WACC Question | The relevant WACC can change depending on the amount of funds a firm raises during a given year. Moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firm’s target capital structure. |
| If a project has normal cash flows… | A project’s NVP increases as the WACC declines. |
| What can only occur if a cash flow has Multiple IRRs? | If the signs of the cash flows change more than once. |
| If two projects are equally risky and mutually exclusive, if one has IRR 15% and the other has 12%, what is possible with their NVPs? | If the WACC is 10%, both projects will have positive NVPs. |
| True of False, if an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land? | True. |
| Operating Question. | Changes in Net Operating working capital should be reflected in a capital budgeting cash flow analysis. |
| What should be considered when a company estimates the cash flows used to analyze a proposed project? | The new project is expected to reduce sales of one of the company’s existing products by 5%. |
| What would make a company less likely to invest in another market? | The investment would preclude the company from being able to make a profitable investment in China. |
| If the average risk projects have a WACC of 10%, it’s below average risk project is 8%, it’s above average risk projects have a WACC of 12%. Which should the company invest in? | The 8% project since it’s below average risk but has a return of 8.5% |
| What is a Terminal Cash Flow? | The cash flow at the end of the life of the project. |
| What is the Risk Analysis Technique that measures changes in the internal rate of return and net present value? | Sensitivity Analysis |
| What is the risk of a project without factoring in the impact of Diversification? | Stand-Alone Risk |
| What is an example of externality that can have a negative effect on a firm? | Cannibalization |
| What creates value for a company because it gives the company the right, but not obligation to take future action to increase its cash flows? | Real Option Marketing Studies are Sunk Costs! |
| If a company does not risk-adjust its discount rate for projects properly, what is likely to occur over time? | The firm’s overall risk level will increase. The firm could potentially reject projects that provide a higher rate of the company than it should require. |
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