Chapter-12-PracticeProblems (1)

Chapter-12-PracticeProblems (1) - CHAPTER 12 Practice...

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CHAPTER 12 – Practice Problems CASH FLOW ESTIMATION AND RISK ANALYSIS (12-1) Cash flow estimation F I K Answer: b EASY 1. Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects. a. True b. False (12-1) Relevant cash flows F I K Answer: b EASY 2. Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis. a. True b. False (12-1) Relevant cash flows F I K Answer: a EASY 3. 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. a. True b. False (12-2) Depreciation cash flows F I K Answer: a EASY 4. The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher, other things held constant. a. True b. False (12-1) Opportunity costs F I Answer: a MEDIUM 5. Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated. a. True b. False (12-1) Sunk costs F I Answer: b MEDIUM 6. Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker's books. The lost sales on the older book are a sunk cost and as such should not be considered in the analysis for the new book. a. True b. False
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(12-1) Cash flow issues C I K Answer: e EASY 7. Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? a. Changes in net working capital. b. Shipping and installation costs. c. Cannibalization effects. d. Opportunity costs. e. Sunk costs that have been expensed for tax purposes. (12-1) Sunk costs C I Answer: c EASY/MEDIUM 8. Which of the following statements is CORRECT? a. A sunk cost is any cost that must be expended in order to complete a
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Chapter-12-PracticeProblems (1) - CHAPTER 12 Practice...

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