Question Details

Given a project's expected cash flows, it is easy to calculateits NPV, IRR, MIRR, payback, and discounted payback. Cash flows areestimated based on information from various sources. There isuncertainty in a project's forecasted cash flows, and some projectsare more uncertain and thus riskier than others. In this chapter,we illustrate how project cash flows are estimated, discusstechniques for measuring risk, and discuss how to choose betweenprojects that have significantly different lives, are mutuallyexclusive, and can be repeated.

The most critical step in capital budgeting analysis is cashflow estimation.

The key is to focus on only

     a. relevant

   b. net income

   c. incremental accounting income or

    d. incremental cash flows.

Factors that complicate the analysis are sunk costs, opportunitycosts, externalities, changes in net operating working capital, andsalvage values. Adjustments to the analysis must be made for

a. inflation

b. interest

c. dividends  

We concentrate on expansion project analyses here but there aresimilarities when analyzing replacement projects.

Give the correct response to each of the followingquestions.

Which of the following items should be included in the capitalbudgeting analysis?
    a. Sunk costs

    b. Interest payments

    c. Dividend payments

    d. Opportunity costs

An outlay that was incurred in the past and cannot be recoveredin the future regardless of whether the project under considerationis accepted is known as
         a. Opportunitycost

         b.Externality

         c. Sunkcost

         d.Cannibalization

Which of the following is an example of an opportunitycost?
a. A publisher introduces a new textbook which reduces sales of oneof their existing textbooks.
b. A firm has land that can be used in building a new store. If thenew store is not built, the firm could sell the land for $2 million(net of taxes).
c. Apple's investment in the iTunes music store boosted sales ofits iPod.
d. The cost of a report done 2 years ago to investigate thepotential of a new plant and the permits required to buildit.
e. Statements a and d are both examples of opportunity costs.
The correct response is -Select-statement astatement bstatementcstatement dstatement eItem 6 .

Which of the following is an example of cannibalization?
a. A publisher introduces a new textbook which reduces sales of oneof their existing textbooks.
b. A firm has land that can be used in building a new store. If thenew store is not built, the firm could sell the land for $2 million(net of taxes).
c. Apple's investment in the iTunes music store boosted sales ofits iPod.
d. The cost of a report done 2 years ago to investigate thepotential of a new plant and the permits required to buildit.
e. Statements c and d are both examples of cannibalization.
The correct response is -Select-statement astatement bstatementcstatement dstatement eItem 7 .