Chapter 09 - Making Capital Investment Decisions
Chapter 09
Making Capital Investment Decisions
Multiple Choice Questions
1. Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following? A. Eroded cash flows B. Deviated projections C. Incremental cash flows D. Directly impacted flows E. Assumed flows
2. Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? A. Forecast assumption principle B. Base assumption principle C. Fallacy principle D. Erosion principle E. Stand-alone principle
3. A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost? A. Fixed B. Forgotten C. Variable D. Opportunity E. Sunk
4. Which one of the following terms refers to the best option that was foregone when a particular investment is selected? A. Side effect B. Erosion C. Sunk cost
D. Opportunity cost E. Marginal cost
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Chapter 09 - Making Capital Investment Decisions
5. Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? A. Opportunity cost B. Sunk cost C. Erosion
D. Replicated flows E. Pirated flows
6. A pro forma financial statement is a financial statement that:
A. expresses all values as a percentage of either total assets or total sales. B. compares actual results to the budgeted amounts. C. compares the performance of a firm to its industry. D. projects future years' operations.
E. values all assets based on their current market values.
7. The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: A. tax shield. B. credit. C. erosion.
D. opportunity cost. E. adjustment.
8. Which one of the following refers to a method of increasing the rate at which an asset is depreciated?
A. Non-cash expense
B. Straight-line depreciation C. Depreciation tax shield
D. Accelerated cost recovery system E. Market based depreciation
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Chapter 09 - Making Capital Investment Decisions
9. Forecasting risk is best defined as: A. reality risk. B. value risk. C. potential risk. D. management risk. E. estimation risk.
10. Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as: A. sensitivity analysis. B. erosion planning. C. scenario analysis. D. benefit planning.
E. opportunity evaluation.
11. Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting? A. Sensitivity analysis B. Erosion planning C. Scenario analysis D. Cost-benefit analysis E. Opportunity cost analysis
12. The opportunities that a manager has to modify a project once it has started are called: A. sensitivity choices. B. managerial options. C. scenario adjustments. D. restructuring options. E. erosion control measures.
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Chapter 09 - Making Capital Investment Decisions
13. Contingency planning focuses on the: A. opportunity costs involved with a project. B. sunk costs related to a project.
C. economic effects on a project's profitability. D. managerial options implicit in a project. E. optional capital requirements of a project.
14. Which one of the following refers to the option to expand into related businesses in the future?
A. Strategic option B. Contingency option C. Soft rationing D. Hard rationing
E. Capital rationing option
15. Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation? A. Sensitivity analysis B. Capital rationing C. Soft rationing
D. Contingency planning E. Sunk cost
16. Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process? A. Soft rationing B. Hard rationing C. Opportunity cost D. Sunk cost
E. Strategic planning
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Chapter 09 - Making Capital Investment Decisions
17. The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation? A. Contingency planning B. Soft rationing C. Hard rationing D. Sensitivity analysis E. Scenario analysis
18. The Shoe Box is considering adding a new line of winter footwear to its product line-up. Which of the following are relevant cash flows for this project?
I. decreased revenue from products currently being offered if this new footwear is added to the lineup
II. revenue from the new line of footwear
III. money spent to date looking for a new product line to add to the store's offerings IV. cost of new counters to display the new line of footwear A. I and IV only B. II and IV only C. II and III only D. I, II, and IV only E. II, III, and IV only
19. Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product? I. molds needed to form the serving trays
II. projected increase in plate and silverware sales if the trays are produced III. a portion of the production manager's current annual salary of $75,000 IV. raw materials used in the production of the serving trays A. I and IV only B. III and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV
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