Chapter 11 Exam 4

Question 1

The investment and resulting subsequent inflows associated with a proposal capital expenditure.

Answer 1

Relevant cash flows

Question 2

Additional cash flows- inflows or outflows- expected to result from a proposed capital expenditure.

Answer 2

Incremental cash flows

Question 3

Relevant cash outflow for a proposed project at time zero.

Answer 3

Initial investment

Question 4

Incremental after-tax cash inflows resulting from implementation of a project during its life.

Answer 4

Operating cash inflows.

Question 5

The after-tax nonoperating cash flow occurring in the final year of a project. It is usually attributable to liquidation of the project.

Answer 5

Terminal cash flow

Question 6

The new outflow necessary to acquire a new asset.

Answer 6

Cost of new asset

Question 7

Any added costs that are necessary to place an asset into operation.

Answer 7

Installation costs

Question 8

Cost of new asset plus it’s installation costs. Equals the assets depreciable value.

Answer 8

Installed cost of new asset

Question 9

Difference between the old assets sale proceeds and any applicable taxes or tax refunds related to its sale.

Answer 9

After tax proceeds from sale of old asset

Question 10

Cash inflows, net of any removal or cleanup costs, resulting from the sale of an existing asset.

Answer 10

Proceeds from sale of old asset

Question 11

Tax that depends on the relationship between the old assets sale price and book value and on existing government tax rules.

Answer 11

Tax on sale of old asset

Question 12

The strict accounting value of an asset, calculated by subtracting its accumulated depreciation from its installed cost.

Answer 12

Book value

Question 13

Difference between the firms current assets and its current liabilities.

Answer 13

Net working capital

Question 14

Difference between a change in current assets and a change in current liabilities.

Answer 14

Change in net working capital.

Question 15

Rate of return that must be earned on a given project to compensate the firms owners adequately, that is, to maintain or improve the firms share price.

Answer 15

Risk-adjusted discount rate (RADR)

Question 16

Approach to evaluating unequal-lived projects that converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount

Answer 16

Annualized net present value (ANPV) approach

Question 17

Approach to capital rationing that involves graphing project IRRS in descending order against the total dollar investment to determine the group of acceptable projects.

Answer 17

IRR approach

Question 18

Approach to capital rationing that is based on the use of present values to determine the group of projects that will maximize owners wealth.

Answer 18

Net present value approach

Question 19

A firm can identify the best time to expand by forecasting future firm values assuming expansion occurs in each year and selecting the year

Answer 19

That generates the highest future firm value.

Question 20

A common use of break even analysis is to determine

Answer 20

How many units of sales are needed to cover all costs.

Question 21

Simulation analysis is useful because the financial manager can specify a range of values for numerous inputs and then determine

Answer 21

The probability of a positive outcome.

Question 22

Behavioral approaches for dealing with project risk mag be used to

Answer 22

Get a feel for a level of risk

Question 23

Firms considering expansion into countries with high levels of political risk can adjust for this risk by

Answer 23

Using risk adjusted discount rates for the project evaluation.

Question 24

A financial manager that creates an investment opportunities Schedule an then imposed a budget constraint to determine which capital budgeting projects to accept is using the

Answer 24

IRR approach

Question 25

An increase in the RADR will result in

Answer 25

A decrease in NPV

Question 26

Incremental earnings are the

Answer 26

Additional sales and costs associated with the project.

Question 27

A common use of break even analysis is to determine

Answer 27

How many units of sales are needed to cover all costs.

Question 28

Examples of current account or assets include:

Answer 28

Cash, accounts receivable and inventories.

Question 29

Examples of current liabilities include:

Answer 29

Accounts payable, notes payable, accruals