Question : 72.Sunk costs: a.are irrelevant. b.should be considered when determining an investment’s relevant : 1325713

 

 

72.Sunk costs:

a.are irrelevant.

b.should be considered when determining an investment’s relevant cash flows.

c.are equal to the firm’s opportunity costs.

d.all of the above.

 

 

 

73.Opportunity costs:

a.are irrelevant.

b.should be considered when determining an investment’s relevant cash flows.

c.are equal to the firm’s sunk costs.

d.all of the above.

 

 

 

74.To help rank projects in a capital rationing environment, managers often use the:

a.profitability index.

b.internal rate of return.

c.payback method.

d.accounting rate of return.

 

 

 

75.The ____ makes capital budgeting ____ complicated.

a.human element, less

b.human element, more

c.human analysis, more

d.human analysis, less

 

 

 

76.Which of the following statements is true?

a.Accountants measure cash flows on a cash basis rather than an accrual basis.

b.Financial analysts focus solely on accrual basis values rather than cash flows when evaluating potential investments.

c.Incremental cash flows effectively represent the marginal costs and marginal benefits expected to result from undertaking a proposed investment.

d.Both (a) and (c) are true.

e.All of the above statements are true.

 

 

 

77.Which of the following statements is false with regard to cash flows resulting from financing costs?

a.They should be included in the cash flow calculations.

b.Financing cash flows can include dividend payments to stockholders and interest payments to bondholders.

c.Financing costs are captured in the discount of a project’s cash flows.

d.If cash outflows associated with financing costs were deducted from the cash flows for a project, it would be double-counting the financing costs of the investment.

e.All of the above statements are false.

 

 

 

78.Which of the following statements is true?

a.Depreciation is a noncash expense and reduces taxable income thereby reducing the cash outflow associated with tax payments.

b.Depreciation’s impact upon cash flows can be accounted for by adding depreciation back to net income before interest and after taxes.

c.Depreciation’s impact upon cash flows can be accounted for by adding the tax savings associated with the depreciation to net income before interest and after taxes.

d.All of the above statements are true.

e.Only (a) and (b) are true.

 

 

 

79.When evaluating a potential capital budgeting decision, fixed asset expenditures

a.should be ignored.

b.often appear as the initial cash outflow for a project.

c.can be significantly increased due to the costs of installing the equipment.

d.All of the above are true.

e.Only (b) and (c) are true.

 

 

 

80.Which of the following would fall under the definition of cannibalism as it applies to capital budgeting?

a.If a firm offered a ‘low-fat’ version of a current product and sales of that new product were expected to reduce sales of the current version.

b.The eating of the flesh of an animal by another animal.

c.If a competitor were to offer a similar or identical product to one your company already offers and this would lead to reduced sales of your product.

d.Both (a) and (c) are true.

e.None of the above is true.

 

 

 

81.The idea that a company may be unable to accept all projects that are expected to have positive NPVs due to the lack of funds is known as:

a.capital rationing

b.capital budgeting

c.capital constraints

d.cannibalization

e.capital structure

 

 

 

82.A firm may be unable to accept all projects that are expected to have positive NPVs due to:

a.the lack of funds

b.the lack of trained and reliable personnel

c.conflicting decisions by the IRR method

d.both (a) and (b) are true

e.All of the above are true

 

 

 

83.Which of the following is a reason why firms do not tend to issue new shares of common stock to fund new projects?

a.Raising new capital via equity may send a unintended negative signal to the market.

b.Issuing new equity dilutes a manager’s ownership stake in the firm (unless they purchase at least an equal proportion of the new shares as they currently own).

c.By rationing capital senior managers hope to weed out investments with an optimistic bias built into the cash flow projections.

d.All of the above are reasons.

e.Only (b) and (c) are reasons.

 

 

 

84.If a firm is subject to capital rationing, when choosing a set of potential investments the firm should rank the projects by:

a.NPV and choose the best ones until funding is exhausted.

b.IRR and choose the best ones until funding is exhausted.

c.PI and choose the best ones until funding is exhausted.

d.ARR and choose the best ones until funding is exhausted.

 

 

 

85.When a firm operates at less than full capacity

a.managers should charge the cost of accelerating new capacity development against the current proposal for using excess capacity.

b.treating that excess capacity as a free asset is a good idea in both the long- and short-run.

c.treating that excess capacity as a free asset may accelerate the need for more capacity in the future.

d.All of the above are true.

e.Both (a) and (c) are true.

 

 

 

86.Which of the following statements is true?

a.To help combat optimistic bias when estimating a project’s cash flows, companies place responsibility for analyzing an investment proposal under an independent authority from the group proposing the project.

b.Financial experts need to have a sense of what is reasonable when forecasting a potential project’s profit margin and growth potential.

c.Financial analysts need to be prepared to defend their assumptions for a potential project and explain why their estimates do not agree with those offered by the project’s advocates.

d.All of the above are true.

e.Only (a) and (c) are true.

 

 

 

 

 

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