Chapter 12 Review Session

Chapter 12 Review Session - Chapter 12 Review Session 2007...

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© 2007 Robert H. Smith School of Business University of Maryland “Chapter 12 Review Session”
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© 2007 Robert H. Smith School of Business University of Maryland Chapter 12 Review Session 1. Adams Audio is considering whether to make an investment in a new type of technology. Which of the following factors should the company consider when it decides to undertake the investment? a. The investment will increase operating cash flows by $1 million. b. The new technology will affect the cash flows produced by its other operations. c. If this investment is not made, then the company will be able to sell one of its laboratories for $2 million. d. All of these statements are correct.
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© 2007 Robert H. Smith School of Business University of Maryland Chapter 12 Review Session 1. D is correct. All of these are relevant cash flows. Operating cash flows must be included, as are externalities – effects on other parts of the company’s operations, and opportunity costs (the sale of the lab for $2 million).
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© 2007 Robert H. Smith School of Business University of Maryland Chapter 12 Review Session 2. Downington Industries has an overall WACC of 10%. The cost of capital reflects the cost of capital for a Downington project with average risk; however, there are large differences among the projects.
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