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Unformatted text preview: Chapter 10--Project Cash Flows and Risk Chapter 10--Project Cash Flows and Risk Student: ___________________________________________________________________________ 1. If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. True False 2. When calculating the cash flows for a project, you should include interest payments. True False 3. With the current techniques available, estimating cash flows has become the easiest step in the analysis of a capital budgeting project. True False 4. Although it is difficult to make accurate forecasts, the initial outlays and subsequent costs of large projects are forecast with great accuracy, but revenues are more uncertain and large errors are not uncommon. True False 5. Net incremental operating cash flow is calculated by adding back the change in depreciation to the change in income after taxes. True False 6. In cash flow estimation, the presence of externalities has no direct cash flow effects. True False 7. A key difference between replacement and expansion project analyses is that with replacement, the incremental cash flows are measured as the net difference between projected cash flows from the current productive assets and cash flows of the proposed new productive assets. True False 8. If an asset being considered for acquisition has beta of zero, its purchase will have no effect on the firm's market risk. True False 9. A particular project might have very uncertain cash flows, hence a highly uncertain NPV and IRR, yet it may not have high market risk. True False 10. When risk is explicitly accounted for in capital budgeting, a project will be acceptable to a firm if its IRR is greater than the firm's average required rate of return. True False 11. One problem with Monte Carlo simulation analysis is that, while the simulation may provide some insights into the riskiness of a project, the analysis does not lead to a clear-cut accept versus reject decision. True False 12. Empirical studies of risk strongly support the contention that investors who are well diversified focus exclusively on market risk when they establish required returns. True False 13. Quantification of risk is the easiest part of incorporating risk into capital budgeting; treatment of that calculated risk measure is more difficult. True False 14. If a firm is considering purchasing an asset whose beta is greater than the current beta of the firm, it should use a discount rate greater than the firm's average required rate of return to evaluate the possible investment. True False 15. Using the same risk-adjusted discount rate to discount all cash flows ignores the fact that the more distant cash flows are riskier....
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This note was uploaded on 01/18/2011 for the course FIN 3604 taught by Professor Patterson during the Spring '10 term at University of South Florida - Tampa.
- Spring '10