ch10 - CHAPTER 10PROJECT CASH FLOWS AND RISK TRUE/FALSE 1...

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C HAPTER 10—P ROJECT C ASH F LOWS AND R ISK TRUE/FALSE 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. ANS: T DIF: Easy TOP: Relevant cash flows 2. When calculating the cash flows for a project, you should include interest payments. ANS: F DIF: Easy TOP: Relevant cash flows 3. With the current techniques available, estimating cash flows has become the easiest step in the analysis of a capital budgeting project. ANS: F DIF: Easy TOP: Estimating cash flows 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. ANS: F DIF: Easy TOP: Estimating cash flows 5. Net incremental operating cash flow is calculated by adding back the change in depreciation to the change in income after taxes. ANS: T DIF: Easy TOP: Incremental cash flows 6. In cash flow estimation, the presence of externalities has no direct cash flow effects. ANS: F DIF: Easy TOP: Externalities and cash flows 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. ANS: T DIF: Easy TOP: Replacement project cash flows 8. If an asset being considered for acquisition has beta of zero, its purchase will have no effect on the firm's market risk. ANS: F DIF: Easy TOP: Market risk 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. ANS: T DIF: Easy TOP: Project risk 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. ANS: F DIF: Easy TOP: Accepting risky projects 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. ANS: T DIF: Easy TOP: Monte Carlo simulation
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214 Chapter 10      Project Cash Flows and Risk 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. ANS: F DIF: Easy TOP: Empirical studies of risk 13. Quantification of risk is the easiest part of incorporating risk into capital budgeting; treatment of that calculated risk measure is more difficult. ANS: F DIF: Easy TOP: Quantification of risk 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.
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