Question : [21].Opportunity costs include those cash inflows that could be generated : 1416412

 

^[21].Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.

 

a.True

b.False

 

^[22].Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker's books.  The lost sales on the older book are a sunk cost and as such should not be considered in the analysis for the new book.

 

a.True

b.False

 

^[23].The change in net operating working capital associated with new projects is always positive, because new projects mean that more operating working capital will be required.

 

a.True

b.False

 

^[24].The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during every year of a project's life, other things held constant.

 

a.True

b.False

 

^[25].Sensitivity analysis measures a project's stand-alone risk by showing how much the project's NPV (or IRR) is affected by a small change in one of the input variables, say sales.  Other things held constant, with the size of the independent variable graphed on the horizontal axis and the NPV on the vertical axis, the steeper the graph of the relationship line, the more risky the project, other things held constant.

 

a.True

b.False

 

 

Multiple Choice:  Conceptual

 

^[26].Which of the following is NOT a relevant cash flow and thus should NOT be reflected in the analysis of a capital budgeting project?

 

a.Changes in net operating working capital.

b.Shipping and installation costs for machinery acquired.

c.Cannibalization effects.

d.Opportunity costs.

e.Sunk costs that have been expensed for tax purposes.

 

^[27].The relative risk of a proposed project is best accounted for by which of the following procedures?

 

a.Adjusting the discount rate upward if the project is judged to have above-average risk.

b.Adjusting the discount rate upward if the project is judged to have below-average risk.

c.Reducing the NPV by 10% for risky projects.

d.Picking a risk factor equal to the average discount rate.

e.Ignoring risk because project risk cannot be measured accurately.

 

^[28].Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects.  Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects?

 

a.Project A, which has average risk and an IRR = 9%.

b.Project B, which has below-average risk and an IRR = 8.5%.

c.Project C, which has above-average risk and an IRR = 11%.

d.Without information about the projects' NPVs we cannot determine which one or ones should be accepted.

e.All of these projects should be accepted as they will produce a positive NPV.

^[29].Which of the following statements is CORRECT?

 

a.A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.

b.A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.

c.A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.

d.Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the project’s NPV.

e.A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm’s existing stores.

 

^[30].Which of the following statements is CORRECT?

 

a.An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.

b.Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.

c.A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank’s other offices.

d.A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.

e.If sunk costs are considered and reflected in a project’s cash flows, then the project’s calculated NPV will be higher than it otherwise would have been had the sunk costs been ignored.