Chapter 9 Flashcards
(24 cards)
Which term refers to the best option that was foregone when a particular investment is selected?
Opportunity cost
ABC Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay o the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?
Current market value of the building
The Tattle Teller has a printing press sitting idly in its backroom. The press has no market value to another printer because the machine utilizes old technology. The firm could get $480 for the press as scrap metal. The press is six years old and originally cost $174,000. The current book value is $3,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project?
$480 (*opportunity cost)
What type of cost should be ignored when evaluating a project because it cannot be recouped?
Sunk cost
What should be excluded from the analysis of a new project?
Sunk costs
Which of the following is an example of a sunk cost?
The research and development costs to produce the current winter footwear samples
ABC Company purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.
Money spent last month repairing a damaged front fender
Sunk costs include any costs that…
Have previously been incurred and cannot be changed
The $800 repair expense on a car is considered a ________ cost.
sunk
Which term describes cash flows of a new project that offset reduced cash flows from a current project?
Erosion
Which example of erosion should be included in capital project analysis?
The anticipated loss of current sales when a new product is launched
The net working capital of a firm will decrease if there is…
a decrease in accounts receivable
The net working capital invested in a project is generally:
recouped at the end of the project
An increase in a firm’s inventory is generally treated as:
a cash outflow at Time zero and a cash inflow at the end of the project
Jen 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 Jen is doing is best described as…
Scenario analysis
Scenario analysis is best described as the determination of the…
reasonable range of project outcomes
Which value is correct for conducting a best-case scenario analysis?
Lowest expected value for fixed costs
Scenario analysis asks questions such as…
What is the best outcome that should reasonably be expected?
Scenario analysis…
Helps determine the reasonable range of expectations for a project’s anticipated outcome
Jenn 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?
Sensitivity analysis
Sensitivity analysis…
Helps identify the variable within a project that presents the greatest forecasting risk
Which is the correct value to use if you are conducting a best-case scenario analysis?
Lowest expected value for fixed costs
Which is the correct value to use if you are conducting a base-case scenario analysis?
Sales price that is most likely to occur
What is the slope of the following sensitivity of NPV to changes in the inputs (Var) of project
cash flows?
∆NPV/∆Var
