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Commerce and BusinessbackBusinessbackCorporate Finance/Financial ManagementbackFundamentals of Corporate FinancebackPractice Set 2492back

Making Capital Investment Decisions

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Question 1
Free
Multiple Choice

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

Choose correct answer/s
A

incremental cash flows.

B

internal cash flows.

C

external cash flows.

D

erosion effects.

E

financing cash flows.

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Question 2
Free
Multiple Choice

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Choose correct answer/s
A

underlying value principle

B

stand-alone principle

C

equivalent cost principle

D

salvage principle

E

fundamental principle

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Question 3
Free
Multiple Choice

Which one of the following costs was incurred in the past and cannot be recouped?

Choose correct answer/s
A

incremental

B

side

C

sunk

D

opportunity

E

erosion

Check answer
Question 4
Free
Multiple Choice

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

Choose correct answer/s
A

salvage value

B

wasted value

C

sunk cost

D

opportunity cost

E

erosion

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Question 5
Free
Multiple Choice

Which one of the following best describes the concept of erosion?

Choose correct answer/s
A

expenses that have already been incurred and cannot be recovered

B

change in net working capital related to implementing a new project

C

the cash flows of a new project that come at the expense of a firm's existing cash flows

D

the alternative that is forfeited when a fixed asset is utilized by a project

E

the differences in a firm's cash flows with and without a particular project

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Question 6
Multiple Choice

Which one of the following best describes pro forma financial statements?

Choose correct answer/s
A
financial statements expressed in a foreign currency
B
financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales
C
financial statements showing projected values for future time periods
D
financial statements expressed in real dollars, given a stated base year
E
financial statements where all accounts are expressed as a percentage of last year's values
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Question 7
Multiple Choice

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?

Choose correct answer/s
A
IRR
B
ACRS
C
AAR
D
straight-line to zero
E
straight-line with salvage
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Question 8
Multiple Choice

The depreciation tax shield is best defined as the:

Choose correct answer/s
A
amount of tax that is saved when an asset is purchased.
B
tax that is avoided when an asset is sold as salvage.
C
amount of tax that is due when an asset is sold.
D
amount of tax that is saved because of the depreciation expense.
E
amount by which the aftertax depreciation expense lowers net income.
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Question 9
Multiple Choice

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

Choose correct answer/s
A
yearly incremental costs
B
sunk costs
C
opportunity costs
D
erosion cost
E
equivalent annual cost
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Question 10
Multiple Choice

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets.The firm is currently considering making handmade wreaths as well.Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Choose correct answer/s
A
storing supplies in the same space currently used for materials storage
B
utilizing the basket manager to oversee wreath production
C
hiring additional employees to handle the increased workload should the firm accept the wreath project
D
researching the market to determine if wreath sales might be profitable before deciding to proceed
E
planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt
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Question 11
Multiple Choice

Danielle's is a furniture store that is considering adding appliances to its offerings.Which of the following should be considered incremental cash flows of this project?
I)utilizing the credit offered by a supplier to purchase the appliance inventory
II)benefiting from increased furniture sales to appliance customers
III)borrowing money from a bank to fund the appliance project
IV)purchasing parts for inventory to handle any appliance repairs that might be necessary

Choose correct answer/s
A
I and II only
B
III and IV only
C
I, II, and IV only
D
II, III, and IV only
E
I, II, III, and IV
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Question 12
Multiple Choice

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Choose correct answer/s
A
sunk
B
total
C
variable
D
incremental
E
fixed
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Question 13
Multiple Choice

Which one of the following is an example of a sunk cost?

Choose correct answer/s
A
$1,500 of lost sales because an item was out of stock
B
$1,200 paid to repair a machine last year
C
$20,000 project that must be forfeited if another project is accepted
D
$4,500 reduction in current shoe sales if a store commences selling sandals
E
$1,800 increase in comic book sales if a store commences selling puzzles
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Question 14
Multiple Choice

G & L Plastic Molders spent $1,200 last week repairing a machine.This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project.When analyzing the proposed project,the $1,200 should be treated as which type of cost?

Choose correct answer/s
A
opportunity
B
fixed
C
incremental
D
erosion
E
sunk
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Question 15
Multiple Choice

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Choose correct answer/s
A
providing both ketchup and mustard for its customer's use
B
repairing the roof of the hot dog stand because of water damage
C
selling fewer hot dogs because hamburgers were added to the menu
D
offering French fries but not onion rings
E
losing sales due to bad weather
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Question 16
Multiple Choice

Which of the following should be included in the analysis of a new product?
I)money already spent for research and development of the new product
II)reduction in sales for a current product once the new product is introduced
III)increase in accounts receivable needed to finance sales of the new product
IV)market value of a machine owned by the firm which will be used to produce the new product

Choose correct answer/s
A
I and III only
B
II and IV only
C
I, II, and III only
D
II, III, and IV only
E
I, II, III, and IV
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Question 17
Multiple Choice

You are considering the purchase of a new machine.Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives.Whichever machine is purchased will be replaced at the end of its useful life.You should select the machine which has the:

Choose correct answer/s
A
longest life.
B
highest annual operating cost.
C
lowest annual operating cost.
D
highest equivalent annual cost.
E
lowest equivalent annual cost.
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Question 18
Multiple Choice

The bid price is:

Choose correct answer/s
A
an aftertax price.
B
the aftertax contribution margin.
C
the highest price you should charge if you want the project.
D
the only price you can bid if the project is to be profitable.
E
the minimum price you should charge if you want to earn a target return on investment.
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Question 19
Multiple Choice

Which one of the following will increase a bid price?

Choose correct answer/s
A
a decrease in the fixed costs
B
a reduction in the net working capital requirement
C
a reduction in the firm's tax rate
D
an increase in the salvage value
E
an increase in the required rate of return
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Question 20
Multiple Choice

All of the following are related to a proposed project.Which of these should be included in the cash flow at time zero?
I)purchase of $1,400 of parts inventory needed to support the project
II)loan of $125,000 used to finance the project
III)depreciation tax shield of $1,100
IV)$6,500 of equipment needed to commence the project

Choose correct answer/s
A
I and II only
B
I and IV only
C
II and IV only
D
I, II, and IV only
E
I, II, III, and IV
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