Question 1

Dismal Outlook is unable to obtain financing for any new projects under any circumstances.This company is faced with:

Accepted Answer

Hard rationing occurs when a company is unable to obtain financing for new projects under any circumstances, indicating severe financial constraints.

Question 2

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?

Accepted Answer

Erosion refers to the reduction in cash flows of an existing project due to the introduction of a new project.

Question 3

Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value.What type of analysis is being conducted?

Accepted Answer

Sensitivity analysis is used to determine how different values of an independent variable affect a particular dependent variable under a given set of assumptions, such as how changes in sales quantity affect net present value.

Question 4

A pro forma financial statement is a financial statement that:

Accepted Answer

A pro forma financial statement is used to project future years' operating results, often for planning and decision-making purposes.

Question 5

Northern Companies has three separate divisions.Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division.This allocation process is called:

Accepted Answer

Soft rationing refers to the internal allocation of capital within a company, where the company limits the amount of capital allocated to each division or project, even though it has sufficient capital overall.

Question 6

The opportunities that a manager has to modify a project once the project has started are called:

Accepted Answer

Managerial options refer to the flexibility and opportunities a manager has to make changes or adjustments to a project after it has commenced, allowing them to respond to new information or changes in the environment.

Question 7

Forecasting risk is best defined as:

Accepted Answer

Forecasting risk, also known as estimation risk, refers to the uncertainty and potential errors involved in predicting future outcomes based on current data and assumptions.

Question 8

Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates.The type of analysis that Jamie is doing is best described as:

Accepted Answer

Scenario analysis involves evaluating the effects of different assumptions on the project's outcomes, such as changes in sales quantity, sales price, and cost estimates, which is what Jamie is doing.

Question 9

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 fits the situation facing the firm?

Accepted Answer

Capital rationing occurs when a firm has limited resources and cannot finance all positive NPV projects, which is the situation Kyle Electric is facing.

Question 10

Which one of the following refers to the option to expand into related businesses in the future?

Accepted Answer

Strategic options refer to the option to expand into related businesses in the future.

Question 11

Contingency planning focuses on the:

Accepted Answer

Contingency planning focuses on the managerial options implicit in a project, such as alternative courses of action, resource allocation, and risk mitigation strategies.

Question 12

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

Accepted Answer

The stand-alone principle refers to the assumption that a project will be evaluated based on its incremental cash flows, treating the project as if it were a separate entity.

Question 13

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns.This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash.To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash.Today, the lot has a market value of $329,000.What value should be included in the analysis of the expansion project for the cost of the land?

Accepted Answer

The current market value of the land should be used in the analysis because it represents the opportunity cost of using the land for the expansion project.

Question 14

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:

Accepted Answer

Changes in cash flows caused by adding a new project are referred to as incremental cash flows. This is because they represent the additional cash flows that the firm expects to receive as a result of undertaking the project. The other options (eroded cash flows, deviated projections, directly impacted flows, opportunity cash flows) do not accurately describe the changes in cash flows caused by a new project. Incremental cash flows refer to the changes that may occur in a firm's projected future cash flows as a result of adding a new project to its portfolio. These changes include increases or decreases in revenue, costs, capital expenditures, taxes, and working capital needs. It is important to calculate the incremental cash flows correctly when evaluating the potential profitability of a new project.

Question 15

Which one of the following refers to a method of increasing the rate at which an asset is depreciated?

Accepted Answer

The Accelerated Cost Recovery System (ACRS) is a method that allows for faster depreciation of assets, thereby increasing the depreciation expense in the earlier years of an asset's life.

Question 16

The Shoe Box is considering adding a new line of winter footwear to its product lineup.When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of:

Accepted Answer

Research and development costs for current samples are sunk costs and should not be included in the analysis of future decisions.

Question 17

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 a(n):

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, and thus should not be considered when making decisions about future projects.

Question 18

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

Accepted Answer

Opportunity cost refers to the best option that was foregone when a particular investment is selected.

Question 19

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

Accepted Answer

The depreciation tax shield refers to the reduction in taxable income due to depreciation expense, which in turn reduces the firm's tax liability.

Question 20

Lake City Plastics currently produces plastic plates and silverware.The company is considering expanding its product offerings to include plastic serving trays.All of the following are relevant costs to this project with the exception of:

Accepted Answer

A percentage of the current operating overhead is not a relevant cost because it is a sunk cost that will not change with the decision to expand the product line.

Quiz 9: Making Capital Investment Decisions