Finance Ch.9 DSM

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

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