Making Capital Investment Decisions Questions

CHAPTER 7
Making Capital Investment Decisions
Multiple Choice Questions:

I. DEFINITIONS

INCREMENTAL CASH FLOWS
a 1. The changes in a firm’s future cash flows that are a direct consequence of accepting a project are called _____ cash flows.
      a. incremental
      b. stand-alone
      c. after-tax
      d. net present value
      e. erosion

      Difficulty level:   Easy

EQUIVALENT ANNUAL COST
e 2. The annual annuity stream of payments with the same present value as a project’s costs is called the project’s _____ cost.
      a. incremental
      b. sunk
      c. opportunity
      d. erosion
      e. equivalent annual

      Difficulty level:   Easy

SUNK COSTS
c 3. A cost that has already been paid, or the liability to pay has already been incurred, is a(n):
      a. salvage value expense.
      b. net working capital expense.
      c. sunk cost.
      d. opportunity cost.
      e. erosion cost.

      Difficulty level:   Easy

OPPORTUNITY COSTS
d 4. The most valuable investment given up if an alternative investment is chosen is a(n):
      a. salvage value expense.
      b. net working capital expense.
      c. sunk cost.
      d. opportunity cost.
      e. erosion cost.

      Difficulty level:   Easy

EROSION COSTS
e 5. The cash flows of a new project that come at the expense of a firm’s existing projects are called:
      a. salvage value expenses.
      b. net working capital expenses.
      c. sunk costs.
      d. opportunity costs.
      e. erosion costs.

      Difficulty level:   Easy

PRO FORMA FINANCIAL STATEMENTS
a 6. A pro forma financial statement is one that:
      a. projects future years’ operations.
      b. is expressed as a percentage of the total assets of the firm.
      c. is expressed as a percentage of the total sales of the firm.
      d. is expressed relative to a chosen base year’s financial statement.... [continues]

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