Question :
[31].Which of the following statements CORRECT?
a.An externality a situation where : 1416413
[31].Which of the following statements is CORRECT?
a.An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality.
b.An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to decline.
c.The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
d.Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
e.Identifying an externality can never lead to an increase in the calculated NPV.
[32].Which of the following statements is CORRECT?
a.An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality.
b.An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to increase.
c.The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
d.Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
e.Identifying an externality can never lead to an increase in the calculated NPV.
[33].Which of the following statements is CORRECT?
a.If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. Thus, cannibalization is dealt with by society through the antitrust laws.
b.If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. Thus, cannibalization is dealt with by society through the antitrust laws.
c.If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward.
d.If cannibalization is determined to exist, then this means that the calculated NPV if cannibalization is considered will be higher than the NPV if this effect is not recognized.
e.Cannibalization, as described in the text, is a type of externality that is not against the law, and any harm it causes is done to the firm itself.
[34].Which of the following statements is CORRECT?
a.Using accelerated depreciation rather than straight line would normally have no effect on a project’s total projected cash flows but it would affect the timing of the cash flows and thus the NPV.
b.Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
c.Corporations must use the same depreciation method (e.g., straight line or accelerated) for stockholder reporting and tax purposes.
d.Since depreciation is not a cash expense, it has no effect on cash flows and thus no effect on capital budgeting decisions.
e.Under accelerated depreciation, higher depreciation charges occur in the early years, and this reduces the early cash flows and thus lowers a project's projected NPV.
[35].Which of the following statements is CORRECT?
a.Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.
b.Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
c.Corporations must use the same depreciation method for both stockholder reporting and tax purposes.
d.Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project’s forecasted NPV.
e.Using accelerated depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project’s forecasted NPV.
[36].Which of the following statements is CORRECT?
a.Since depreciation is not a cash expense, and since cash flows and not accounting income are the relevant input, depreciation plays no role in capital budgeting.
b.Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 3 years or longer.
c.If they use accelerated depreciation, firms will write off assets slower than they would under straight-line depreciation, and as a result projects’ forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.
d.If they use accelerated depreciation, firms can write off assets faster than they could under straight-line depreciation, and as a result projects’ forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.
e.If they use accelerated depreciation, firms can write off assets faster than they could under straight-line depreciation, and as a result projects’ forecasted NPVs are normally higher than they would be if straight-line depreciation were required for tax purposes.
[37].A company is considering a new project. The CFO plans to calculate the project’s NPV by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flows), then discounting those cash flows at the company’s overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?
a.All sunk costs that have been incurred relating to the project.
b.All interest expenses on debt used to help finance the project.
c.The additional investment in net operating working capital required to operate the project, even if that investment will be recovered at the end of the project’s life.
d.Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
e.Effects of the project on other divisions of the firm, but only if those effects lower the project’s own direct cash flows.
[38].Which of the following factors should be included in the cash flows used to estimate a project’s NPV?
a.All costs associated with the project that have been incurred prior to the time the analysis is being conducted.
b.Interest on funds borrowed to help finance the project.
c.The end-of-project recovery of any additional net operating working capital required to operate the project.
d.Cannibalization effects, but only if those effects increase the project’s projected cash flows.
e.Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.
[39].When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:
a.Changes in net operating working capital attributable to the project.
b.Previous expenditures associated with a market test to determine the feasibility of the project, provided those costs have been expensed for tax purposes.
c.The value of a building owned by the firm that will be used for this project.
d.A decline in the sales of an existing product, provided that decline is directly attributable to this project.
e.The salvage value of assets used for the project that will be recovered at the end of the project’s life.
[40].Rowell Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Rowell owns the building free and clear--there is no mortgage on it. Which of the following statements is CORRECT?
a.Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows of the capital budgeting analysis for any new project.
b.If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
c.This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider.
d.Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.
e.If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.
