| Nominal cash flows: | have not been adjusted for inflation. |
| Which of the following is an example of a sunk cost? | Amount spent on a test market. |
| Sunk costs are: | previous cash outflows not relevant to the project decision. |
| The tax savings generated due to the ability to expense or depreciate an asset for tax purposes is known as: | the depreciation tax shield. |
| Giancarlo has received an inheritance from his rich uncle and is contemplating the purchase of a Suzuki XL7. In an attempt to make a rational decision, Giancarlo has identified the following cash flow estimates: Negotiated price of new Suzuki XL 7 $24,675Taxes and fees on a new car purchase $1,732Proceeds from the trade-in of old car $9,285Estimated value of the Suzuki XL7 in 5 years $7,285Estimated value of old car in 5 years $3,572Estimated annual repair cost on Suzuki XL7 $350Estimated annual repair cost on old car $925 What would be Giancarlo’s operating cash flow in year 5? | -$575 |
| Real cash flows are those that include: | nominal cash flows minus inflation. |
| Most projects will have a decision point where the project can be abandoned or pursued further. The right to make a certain decision is known as a __________ in finance. | real option |
| Which of the following is an example of an externality that will generate relevant cash flows? | The additional sales revenue of complementary products. |
| The relevant cash flows of a project are best described as: | incremental cash flows. |
| Giancarlo has received an inheritance from his rich uncle and is contemplating the purchase of a Suzuki XL7. In an attempt to make a rational decision, Giancarlo has identified the following cash flow estimates: Negotiated price of new Suzuki XL 7 $24,675Taxes and fees on a new car purchase $1,732Proceeds from the trade-in of old car $9,285Estimated value of the Suzuki XL7 in 5 years $7,285Estimated value of old car in 5 years $3,572Estimated annual repair cost on Suzuki XL7 $350Estimated annual repair cost on old car $925 What would be Giancarlo’s initial investment in the Suzuki XL7? | $17,122 |
| An incremental cash flow valuation considers: | all project cash flows including cannibalization. |
| Which of the following is a relevant opportunity cost that should be considered an incremental cash flow? | Lost facility rental income |
| A statistically based behavioral approach to project analysis that applies predetermined probability distributions is the: | simulation method. |
| Which of the following cash flows should be included in incremental free cash flows? | Capital expenditures necessary to fund the new project. |
| In the context of capital budgeting, risk refers to the: | degree of variability of the cash inflows. |
| A replacement investment is one that: | replaces existing assets. |
| A method for evaluating a project that uses a number of possible values for a given variable, such as cash inflows, to assess its impact on the firm’s return is: | sensitivity analysis. |
| The sale of an ordinary asset for its book value results in: | no tax benefit. |
| We only want to consider incremental earnings in the capital budgeting process. Incremental earnings are the: | additional sales and costs associated with the project. |
| When a business undertakes a new project it will often need to invest additional funds in net working capital to cover items such as: | increased inventory levels. |
| Capital budgeting is the process of: | evaluating a firm’s investment choices. |
| A common use of break-even analysis is to determine: | how many units of sales are needed to cover all costs. |
| Which of the following formulas is the correct formula used to calculate incremental earnings? | (incremental revenues – incremental costs – depreciation) x (1 – T) |
| A firm has undertaken a project with an initial investment of $100,000. The firm’s cost of capital is 14%Year 1 50,000Year 2 65,000Year 3 90,000What is the NPV for this project? | $54,623 |
