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Chapter 10
Making Capital Investment Decisions
Multiple Choice Questions
1.
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:
2.
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?
3.
Which one of the following costs was incurred in the past and cannot be
recouped?
4.
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?
5.
Which one of the following best describes the concept of erosion?
6.
Which one of the following best describes pro forma financial statements?
7.
Which one of the following is the depreciation method which allows
accelerated write-offs of property under various lifetime classifications?
8.
The depreciation tax shield is best defined as the:
9.
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?
10.
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?
11.
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
12.
The stand-alone principle advocates that project analysis should be based
solely on which one of the following costs?
13.
Which one of the following is an example of a sunk cost?
14.
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?
15.
Which one of the following best illustrates erosion as it relates to a hot dog
stand located on the beach?
16.
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
17.
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:
18.
The bid price is:
19.
Which one of the following will increase a bid price?
20.
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
