1 Finance 351: Financial Management Instructor: Shuming Liu Sample Quiz 2 1. The following are all important items to look out for when you perform capital budgeting for a company except A) Be aware of allocated overhead costs. B) Include all indirect effects. C) Include sunk costs. D) Include opportunity costs. E) Recognize the investment in working capital. Answer: C 2. The purpose of sensitivity analysis is to show: A) the optimal level of the capital budget. B) how price changes affect break-even volume. C) seasonal variation in product demand. D) how variables in a project affect profitability. Answer: D 3. Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is: A) $75,000 B) $25,000 C) $20,000 D) $5,000 Answer: B 4. When projects are mutually exclusive, selection should be made according to the project with the: A) longer life. B) larger initial size. C) highest IRR. D) highest NPV. Answer: D 5. Which of the following statements regarding investment in working capital is incorrect ?
2 A) Investment in working capital, unlike investment in plant and equipment, represents a positive cash flow. B) The cash flow is measured by the change in working capital, not the level of working capital. C) The working capital may change during the life of the project. D) Working capital is recovered at the end of the project. E)
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