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1、Chapter 09Making Capital Investment Decisions Multiple Choice Questions1.Any changes to a firms projected future cash flows that are caused by adding a new project are referred to as which one of the following?A.Eroded cash flowsB.Deviated projectionsC.Incremental cash flowsD.Directly impacted flows
2、E.Assumed flows2.Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?A.Forecast assumption principleB.Base assumption principleC.Fallacy principleD.Erosion principleE.Stand-alone principle3.A cost that should be ignored
3、when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?A.FixedB.ForgottenC.VariableD.OpportunityE.Sunk4.Which one of the following terms refers to the best option that was foregone when a particular investment is selected?A.S
4、ide effectB.ErosionC.Sunk costD.Opportunity costE.Marginal cost5.Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?A.Opportunity costB.Sunk costC.ErosionD.Replicated flowsE.Pirated
5、flows6.A pro forma financial statement is a financial statement that:A.expresses all values as a percentage of either total assets or total sales.B.compares actual results to the budgeted amounts.C.compares the performance of a firm to its industry.D.projects future years operations.E.values all ass
6、ets based on their current market values.7.The amount by which a firms tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:A.tax shield.B.credit.C.erosion.D.opportunity cost.E.adjustment.8.Which one of the following refers to a method of increasing the rate
7、 at which an asset is depreciated?A.Non-cash expenseB.Straight-line depreciationC.Depreciation tax shieldD.Accelerated cost recovery systemE.Market based depreciation9.Forecasting risk is best defined as:A.reality risk.B.value risk.C.potential risk.D.management risk.E.estimation risk.10.Jamie is ana
8、lyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as:A.sensitivity analysis.B.erosion planning.C.scenario analysis.D.benefit planning.E.opportunity evaluation.11.Mark is analyzing a proposed project to dete
9、rmine how changes in the variable costs per unit would affect the projects net present value. What type of analysis is Mark conducting?A.Sensitivity analysisB.Erosion planningC.Scenario analysisD.Cost-benefit analysisE.Opportunity cost analysis12.The opportunities that a manager has to modify a proj
10、ect once it has started are called:A.sensitivity choices.B.managerial options.C.scenario adjustments.D.restructuring options.E.erosion control measures.13.Contingency planning focuses on the:A.opportunity costs involved with a project.B.sunk costs related to a project.C.economic effects on a project
11、s profitability.D.managerial options implicit in a project.E.optional capital requirements of a project.14.Which one of the following refers to the option to expand into related businesses in the future?A.Strategic optionB.Contingency optionC.Soft rationingD.Hard rationingE.Capital rationing option1
12、5.Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firms situation?A.Sensitivity analysisB.Capital rationingC.Soft rationingD.Contingency planni
13、ngE.Sunk cost16.Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process?A.Soft rationingB.Hard rationingC.Opportunity costD.Sunk costE.Strategic planning17.The B
14、lackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation?A.Contingency planningB.Soft rationingC.Hard rationingD.Sensitivity analysisE.Scenario analysis18.The Shoe Box is considering adding a new line of winter footwear to i
15、ts product line-up. Which of the following are relevant cash flows for this project?I. decreased revenue from products currently being offered if this new footwear is added to the lineupII. revenue from the new line of footwearIII. money spent to date looking for a new product line to add to the sto
16、res offeringsIV. cost of new counters to display the new line of footwearA.I and IV onlyB.II and IV onlyC.II and III onlyD.I, II, and IV onlyE.II, III, and IV only19.Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to inc
17、lude plastic serving trays. Which of the following are cash flows relevant to the new product?I. molds needed to form the serving traysII. projected increase in plate and silverware sales if the trays are producedIII. a portion of the production managers current annual salary of $75,000IV. raw mater
18、ials used in the production of the serving traysA.I and IV onlyB.III and IV onlyC.I, II, and IV onlyD.I, III, and IV onlyE.I, II, III, and IV20.The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $
19、299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?A.The sum of the
20、cash paid to date for both the lot and the improvementsB.The original purchase price onlyC.The current market value of the land plus the cash paid for the improvementsD.The current market value of the landE.Zero because the land and the improvements were purchased with cash21.Weston Steel purchased
21、a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Westons can no longer use the furnace nor have they been able to locate anyone willing to purchase the furnace. Given the curren
22、t situation, the furnace is best described as which type of cost?A.ErosionB.BookC.SunkD.MarketE.Opportunity22.Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has
23、a usable life of eight years.A.New tires that will be purchased this winterB.Costs of repairs needed so the truck can pass inspection next monthC.Money spent last month repairing a damaged front fenderD.Engine tune-up that is scheduled for this afternoonE.Cost for a truck driver for the remainder of
24、 the trucks useful life23.The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased 8 years ago for $689,000. Over the past 8 years, the firm rented out the building and used the rent to pay off the mortgage. The buildin
25、g is now owned free and clear and has a current market value of $898,000. The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated present value of the future income from this centre is $2.9 million. Which one of th
26、e following defines the opportunity cost of the remodeling project?A.Initial cost of the buildingB.Cost of the remodelingC.Current market value of the buildingD.Initial cost of the building plus the remodeling costsE.Current market value of the building plus the remodeling costs24.Bruce Moneybags ow
27、ns several restaurants and hotels near a local interstate. One restaurant, Beef and More, needs modernized. He is trying to decide whether to accept an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 mil
28、lion. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in todays dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what
29、 opportunity cost, if any should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.A.There is no opportunity cost since the current restaurant is owned free and clear.B.The opportunity cost is the value of the current offer to
30、 buy the restaurant.C.The opportunity cost is the cost of the needed improvements.D.The opportunity cost is the present value of the loss of operating cash flows while the restaurant is closed for renovation.E.The opportunity cost is the cost of the renovations plus the loss of the operating cash fl
31、ows during the renovation.25.Isabella is considering three mutually exclusive options for the additional space she just added to her specialty womens store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts departme
32、nt, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should Isabella accept?A.None of the optionsB.Fabric and quilting o
33、nlyC.Exclusive gifts onlyD.Exclusive gifts and decorator items onlyE.All three options26.Steve owns a store that caters primarily to men and their hobbies. He is contemplating greatly expanding the hunting and fishing section of the store. If he does this, he expects his fishing and hunting sales wi
34、ll increase, his camping gear sales will increase, and his model train sales will decrease. Which of the following should Steve include in his revenue projection for the expansion project?I. increase in fishing and hunting salesII. increase in camping gear salesIII. decrease in model train salesA.I
35、onlyB.II onlyC.I and III onlyD.II and III onlyE.I, II, and III27.Lakeside Rides is adding a new roller coaster to its amusement park. The firm expects this addition to increase its overall ticket sales and increase attendance at its park. In particular, the firm expects to sell more tickets for its
36、current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster?I. ticket sal
37、es for the new roller coasterII. change in ticket sales for the existing coasterIII. change in ticket sales for the boat rideIV. change in food and beverage salesA.I onlyB.III onlyC.II and III onlyD.I, II, and III onlyE.II, III, and IV only28.Which of the following should be included in the analysis
38、 of a proposed investment?I. erosion effectsII. opportunity costsIII. sunk costsIV. side effectsA.I onlyB.II onlyC.I and IV onlyD.I, II, and IV onlyE.I, II, III, and IV29.The net working capital invested in a project is generally:A.a sunk cost.B.an opportunity cost.C.recouped in the first year of th
39、e project.D.recouped at the end of the project.E.depreciated to a zero balance over the life of the project.30.A proposed project will increase a firms accounts payables. This increase is generally:A.treated as an erosion cost.B.treated as an opportunity cost.C.a sunk cost and should be ignored.D.a
40、cash outflow at time zero and a cash inflow at the end of the project.E.a cash inflow at time zero and a cash outflow at the end of the project.31.Which of the following are cash inflows from net working capital?I. increase in accounts payableII. increase in inventoryIII. decrease in accounts receiv
41、ableIV. decrease in fixed assetsA.II onlyB.III onlyC.I and III onlyD.III and IV onlyE.I, II, and III only32.Which of the following should be included when compiling pro forma statements for a proposed investment?I. forecasted salesII. start-up costsIII. aftertax salvage value of any assets soldIV. a
42、nticipated changes in net working capitalA.I onlyB.II and IV onlyC.I, II, and III onlyD.II, III, and IV onlyE.I, II, III, and IV33.Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax brac
43、ket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the:A.depreciation expense for Firm A will be greater than Firm Bs expense every year.B.equipment has a higher value on Firm Bs books than on Firm As at the end of year two.C.operating
44、 cash flow of Firm A is less than that of Firm B for year two.D.market value of Firm As equipment is greater than the market value of Firm Bs equipment.E.market value of Firm Bs equipment is greater than the market value of Firm As equipment.34.Assume a firm has positive net earnings. The operating
45、cash flow of this firm:A.ignores both depreciation and taxes.B.is unaffected by the depreciation expense.C.must be negative.D.increases when tax rates decrease.E.is equal to net income minus depreciation.35.The operating cash flows of a project:A.are unaffected by the depreciation method selected.B.
46、are equal to the projects total projected net income.C.decrease when net working capital increases.D.include any aftertax salvage values.E.include erosion effects.36.The tax shield approach to computing the operating cash flow, given a tax-paying firm:A.ignores both interest expense and taxes.B.sepa
47、rates cash inflows from cash outflows.C.considers the changes in net working capital resulting from a new project.D.is based on the fact that depreciation does not affect the operating cash flows.E.recognizes that depreciation creates a cash inflow.37.Which one of the following will increase the operating cash flow as computed using the tax shield approach?A.Decrease in depreciationB.Decrease in salesC.Increase in variable costsD.Decrease in fixed costsE.Increase in the tax rate38.Scenario analysis is bes
