Question 1

When a new product competes with, and therefore affects, the sales of another product of the same company, this is referred to as:

Accepted Answer

Cannibalization occurs when a new product eats into the sales of another product within the same company, often because they appeal to similar customer segments or serve similar needs.

Question 2

In the winter, a restaurant serves three hearty soups in addition to its regular menu. A concern about how the sales of the soup could negatively affect the sales of sandwiches would best be described as a concern about:

Accepted Answer

Cannibalization refers to the reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer. In this case, the introduction of soups could potentially reduce the sales of sandwiches, hence the concern about cannibalization.

Question 3

In the sale of goods on account, which of the accounts is not increased from the sale?

Accepted Answer

Inventory is decreased in the sale of goods on account because the goods are leaving the seller's inventory to fulfill the sale.

Question 4

In the sale of goods on account, which of the accounts is not increased from the sale?

Accepted Answer

Cash is not increased in the sale of goods on account because the transaction is made on credit, not with immediate cash payment. Sales increase as revenue is recognized, Cost of Goods Sold increases as the goods are sold and their cost is recognized, and Accounts Receivable increases as the customer now owes money to the company.

Question 5

In the sale of goods on account, which of the following accounts is decreased from the collection of cash from the sale on account?

Accepted Answer

When cash is collected from a sale on account, the Accounts Receivable account is decreased because the customer has paid off their outstanding balance.

Question 6

Which of the following would not be considered a sunk cost when performing a cash flow analysis of a new project?

Accepted Answer

Sunk costs are expenses that have already been incurred and cannot be recovered. Increased inventory the company will have to carry for the new project is not a sunk cost because it is a future expense related to the operation of the project, not a past expense.

Question 7

Which of the following should be considered when performing a cash flow analysis of a new project?

Accepted Answer

The answer of Which of the following should be considered...

Question 8

The right to delay, abandon or reject a project is referred to as a:

Accepted Answer

Real options give the holder the right, but not the obligation, to undertake certain business decisions, such as deferring, abandoning, expanding, staging, or contracting a capital investment project.

Question 9

Which one of the following would not be considered a real option? The option to:

Accepted Answer

Real options refer to choices or opportunities available to a company or an investor that add value to a project or investment. These options typically involve tangible assets or business decisions, such as expanding operations, abandoning a project, or switching technologies. Option D, buying shares of stock at a fixed price within a specified period, is a financial option rather than a real option, as it pertains to financial securities rather than real assets or operational decisions.

Question 10

The Über Corporation is evaluating a new product. The cost of the equipment to produce the new product is $100 million, and the cost to set up the equipment is $1 million. Über spent $5 million on research and development for this new product. In addition, Über will need to use a building that originally cost $200 million, but which is on the books at $20 million; Über has no other use for this building and it would be unused if it does not use this building. The initial cash outlay associated with this project is closest to:

Accepted Answer

The initial cash outlay for the project includes the cost of the equipment ($100 million) and the cost to set up the equipment ($1 million), totaling $101 million. The $5 million spent on research and development is a sunk cost and should not be included in the initial cash outlay. The cost or book value of the building is also not included since it is a sunk cost and the building has no alternative use.

Question 11

The Proto Corporation is evaluating a new product. The cost of the equipment to produce the new product is $10 million, and the cost to set up the equipment is $0.1 million. Proto spent $4 million on research and development for this new product. In addition, Proto will need to use a building that originally cost $200 million, but which is on the books at $6 million; Proto has no other use for this building and it would be unused if it does not use this building. The initial cash outlay associated with this project is closest to:

Accepted Answer

The initial cash outlay for the project includes the cost of the equipment ($10 million) and the cost to set up the equipment ($0.1 million). The research and development costs are sunk costs and should not be included in the initial cash outlay. The book value or original cost of the building is also not relevant since it has no alternative use and does not represent an additional cash outlay for this project. Therefore, the initial cash outlay is $10 million + $0.1 million = $10.1 million.

Question 12

Which of the following does not refer to the total cash outlay required to initiate an investment project?

Accepted Answer

Working capital refers to the funds a business requires for its day-to-day operations, not specifically to the initial cash required to start an investment project. Initial cash flow, initial cash outlay, and investment cash flow all relate to the funds needed to begin an investment.

Question 13

The system of depreciation prescribed by U.S. tax law is best described as the:

Accepted Answer

The system of depreciation prescribed by U.S. tax law is the Modified Accelerated Cost Recovery System (MACRS), which allows for faster depreciation in the early years of an asset's life.

Question 14

The tax savings associated with the depreciation deduction for tax purposes is best described as:

Accepted Answer

The answer of The tax savings associated with the depreciation...

Question 15

Suppose an investment requires the purchase of equipment for $10,000 and decreases working capital by $500. The company must spend $1,000 to install the equipment. The investment cash flow is closest to:

Accepted Answer

The investment cash flow is calculated by adding the cost of purchasing the equipment ($10,000), the cost to install the equipment ($1,000), and the decrease in working capital (-$500, which is actually an inflow because it's a decrease in working capital). Therefore, the total investment cash flow is $10,000 + $1,000 - $500 = $10,500.

Question 16

Consider a project that requires the purchase of equipment for $10,000 and increases working capital by $500. The company must spend $1,000 to install the equipment. The investment cash flow is closest to:

Accepted Answer

The investment cash flow includes the purchase of equipment ($10,000), installation costs ($1,000), and the increase in working capital ($500), totaling $11,500.

Question 17

Consider a project that requires investing $100,000 in an asset that is classified as a 3-year asset for tax purposes, even though its useful life is four years. If the investing company's marginal tax rate is 38 percent, the depreciation tax shield for the second year is closest to:

Accepted Answer

The depreciation tax shield for the second year can be calculated using the double declining balance method for a 3-year asset. The depreciation rate is double the straight-line rate, which is 2/3 for a 3-year asset. In the second year, the depreciation expense is calculated on the remaining book value after the first year's depreciation. The first year's depreciation is 2/3 of 1/3 = 2/9 of $100,000, which is approximately $22,222. The remaining book value is $100,000 - $22,222 = $77,778. The second year's depreciation is again 2/9 of $77,778, which is approximately $17,283. The tax shield is the depreciation expense times the tax rate: $17,283 * 38% ≈ $6,567. However, this calculation does not match the provided options directly due to a mistake in the calculation process. The correct approach for the second year using MACRS for a 3-year asset would typically involve using the given percentage for the second year from the MACRS table, which is 32%. Thus, the depreciation expense is 32% of $100,000 = $32,000. The tax shield is then $32,000 * 38% = $12,160. The error in the explanation indicates a miscalculation or misunderstanding of the depreciation method or tax shield calculation. The correct answer should be based on the correct application of the MACRS depreciation method and the company's marginal tax rate to the initial investment. Given the options and the typical calculation method, none of the provided calculations accurately reflect the correct process for determining the depreciation tax shield for the second year based on the standard MACRS rates and the given tax rate. Therefore, a reevaluation of the calculation is necessary to align with the correct methodology.

Question 18

Suppose an asset is classified as a 3-year asset for tax purposes, but has a useful life of 5 years. If the asset's depreciation for tax purposes for the first year is $30,000, the depreciation tax shield for the first year of the asset's useful life, if the tax rate is 35 percent, is closest to:

Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. Therefore, for the first year, it is $30,000 * 0.35 = $10,500.

Question 19

Suppose an investment requires the company to increase inventories by $30,000 at the beginning of the project. The company's marginal tax rate is 40 percent. The effect of this change in inventory on the initial cash outlay closest to:

Accepted Answer

The initial cash outlay for increasing inventories by $30,000 is a cash outflow, so the effect is -$30,000. Taxes do not affect the initial investment in inventory directly.

Question 20

Suppose an investment requires the company to increase inventories by $30,000 at the beginning of the project. However, the financial manager expects that accounts payable will increase by $10,000 initially. The company's marginal tax rate is 40 percent. The effect of this change in inventory and accounts payable on the initial cash outlay closest to:

Accepted Answer

The initial cash outlay is affected by the net change in working capital, which is the increase in inventories ($30,000) minus the increase in accounts payable ($10,000), resulting in a net increase of $20,000. Taxes do not affect this calculation as it involves changes in balance sheet accounts, not taxable income. Therefore, the effect on the initial cash outlay is -$20,000.

Quiz 11: Capital Budgeting: Cash Flows and Risk

When a new product competes with, and therefore affects, the sales of another product of the same company, this is referred to as:

In the winter, a restaurant serves three hearty soups in addition to its regular menu. A concern about how the sales of the soup could negatively affect the sales of sandwiches would best be described as a concern about:

In the sale of goods on account, which of the accounts is not increased from the sale?

In the sale of goods on account, which of the accounts is not increased from the sale?

In the sale of goods on account, which of the following accounts is decreased from the collection of cash from the sale on account?

Which of the following would not be considered a sunk cost when performing a cash flow analysis of a new project?

Which of the following should be considered when performing a cash flow analysis of a new project?

The right to delay, abandon or reject a project is referred to as a:

Which one of the following would not be considered a real option? The option to:

Which of the following does not refer to the total cash outlay required to initiate an investment project?

The system of depreciation prescribed by U.S. tax law is best described as the:

The tax savings associated with the depreciation deduction for tax purposes is best described as:

Suppose an investment requires the purchase of equipment for $10,000 and decreases working capital by $500. The company must spend $1,000 to install the equipment. The investment cash flow is closest to:

Consider a project that requires the purchase of equipment for $10,000 and increases working capital by $500. The company must spend $1,000 to install the equipment. The investment cash flow is closest to:

Consider a project that requires investing $100,000 in an asset that is classified as a 3-year asset for tax purposes, even though its useful life is four years. If the investing company's marginal tax rate is 38 percent, the depreciation tax shield for the second year is closest to:

Suppose an asset is classified as a 3-year asset for tax purposes, but has a useful life of 5 years. If the asset's depreciation for tax purposes for the first year is $30,000, the depreciation tax shield for the first year of the asset's useful life, if the tax rate is 35 percent, is closest to:

Suppose an investment requires the company to increase inventories by $30,000 at the beginning of the project. The company's marginal tax rate is 40 percent. The effect of this change in inventory on the initial cash outlay closest to: