Unit 12: Cash Flow Estimation And Risk Analysis Flashcards
Which of the following statements is most correct?
a. The rate of depreciation will often affect operating cash flows, eventhough depreciation is not a cash expense.
b. Corporations should for fully account investment decisions.sunk costs when making
c. Corporations should fully account for opportunity costs when makinginvestment decisions.
d. Statements a and c are correct.
e. All of the statements above are correct.
D
A company is considering a new project. The company’s CFO plans tocalculate the project’s NPV by discounting the relevant cash flows(which include the initial up-front costs, the operating cash flows, andthe terminal cash flows) at the company’s cost of capital (WACC). Whichof the following factors should the CFO include when estimating therelevant cash flows?
a. Any sunk costs associated with the project.
b. Any interest expenses associated with the project.
c. Any opportunity costs associated with the project.
d. Statements b and c are correct.
e. All of the statements above are correct.
C
When evaluating potential projects, which of the following factors should be incorporated as part of a project’s estimated cash flows?
a. Any sunk costs that were incurred in the past prior to consideringthe proposed project.
b. Any opportunity costs that are incurred if the project is undertaken.
c. Any externalities (both positive and negative) that are incurred ifthe project is undertaken.
d. Statements b and c are correct.
e. All of the statements above are correct.
D
Which of the following statements is most correct?
a. When evaluating corporate projects it is important to include allsunk costs in the estimated cash flows.
b. When evaluating corporate projects it is important to include allrelevant externalities in the estimated cash flows.
c. Interest expenses should be included in project cash flows.
d. Statements a and b are correct.
e. All of the statements above are correct.
B
Which of the following is not a cash flow that results from the decisionto accept a project?
a. Changes in net operating working capital.
b. Shipping and installation costs.
c. Sunk costs.
d. Opportunity costs.
e. Externalities.
C
When evaluating a new project, the firm should consider all of thefollowing factors except:
a. Changes in net operating working capital attributable to the project.
b. Previous expenditures associated with a market test to determine thefeasibility of the project, if the expenditures have been expensedfor tax purposes.
c. Current rental income of a building owned by the firm if it is notused for this project.
d. The decline in sales of an existing product directly attributable tothis project.
e. All of the statements above should be considered.
B
Which of the following items should Bev’s Beverage Inc. take into accountwhen evaluating a proposed prune juice project?
a. The company spent $300,000 two years ago to renovate its Cincinnatiplant. These renovations were made in anticipation of another projectthat the company ultimately did not undertake.
b. If the company did not proceed with the prune juice project, theCincinnati plant could generate leasing income of $75,000 a year.
c. If the company proceeds with the prune juice project, it is estimatedthat sales of the company’s apple juice will fall by 3 percent a year.
d. Statements b and c are correct.
e. All of the statements above are correct.
D
Which of the following should a company consider in an analysis whenevaluating a proposed project?
a. The new project is expected to reduce sales of the company’s existingproducts by 5 percent a year.
b. Vacant facilities not currently leased out could instead be leasedout for $10 million a year.
c. The company spent $30 million last year to improve the vacantfacilities in which the new project will be housed.
d. Statements a and b are correct.
e. All of the statements above are correct.
D
Hancock Furniture Inc. is considering new expansion plans for building anew store. In reviewing the proposed new store, several members of thefirm’s financial staff have made a number of points regarding theproposed project. Which of the following items should the CFO includein the analysis when estimating the project’s net present value (NPV)?
a. The new store is expected to take away sales from two of the firm’sexisting stores located in the same town.
b. The company owns the land that is being considered for use in theproposed project. developer.This land could instead be leased to a local
c. The company spent $2 million two years ago to put together a nationaladvertising campaign. This campaign helped generate the demand forsome of its past products, which have helped make it possible for thefirm to consider opening a new store.
d. Statements a and b are correct.
e. All of the statements above are correct.
D
Twin Hills Inc. is considering a proposed project. Given availableinformation, it is currently estimated that the proposed project isrisky but has a positive net present value. Which of the followingfactors would make the company less likely to adopt the current project?
a. It is revealed that if the company proceeds with the proposedproject, the company will lose two other accounts, both of which havepositive NPVs.
b. It is revealed that the company has an option to back out of theproject 2 years from now, if it is discovered to be unprofitable.
c. It is revealed that if the company proceeds with the project, it willhave an option to repeat the project 4 years from now.
d. Statements a and b are correct.
e. Statements b and c are correct.
A
A company is considering a proposed expansion to its facilities. of the following statements is most correct?Which
a. In calculating the project’s operating cash flows, the firm shouldnot subtract out financing costs such as interest expense, sincethese costs are already included in the WACC, which is used todiscount the project’s net cash flows.
b. Since depreciation is a non-cash expense, the firm does not need toknow the depreciation rate when calculating the operating cash flows.
c. When estimating the project’s operating cash flows, it is importantto include any opportunity costs and sunk costs, but the firm shouldignore cash flows from externalities since they are accounted forelsewhere.
d. Statements a and c are correct.
e. None of the statements above is correct.
A
Which of the following statements is correct?
a. Well-diversified stockholders do not consider corporate risk whendetermining required rates of return.
b. Undiversified stockholders, including the owners of small businesses,are more concerned about corporate risk than market risk.
c. Empirical studies of the determinants of required rates of return (k)have found that only market risk affects stock prices.
d. Market risk is important but does not have a direct effect on stockprice because it only affects beta.
e. All of the statements above are correct
B
Which of the following is not discussed in the text as a method foranalyzing risk in capital budgeting?
a. Sensitivity analysis.
b. Beta, or CAPM, analysis.
c. Monte Carlo simulation.
d. Scenario analysis.
e. All of the statements above are discussed in the text as methods foranalyzing risk in capital budgeting
E
