Question 1

Which of the following statements is FALSE?

Accepted Answer

A

Question 2

Which of the following statements is FALSE?

Accepted Answer

When evaluating a capital budgeting decision, we do not generally include interest expense in the analysis. Interest expense is already included in the cost of capital (the required return on investment), which is used to discount the cash flows of the project to determine its net present value.

Question 3

The amount that Ford Motor Company will owe in taxes next year without the launch of the new SUV is closest to:

Accepted Answer

A)= $80 × .30 = $24 million

Question 4

The level of incremental sales associated with introducing the new one hour photo service is closest to:

Accepted Answer

The answer of The level of incremental sales associated with...

Question 5

Which of the following statements is FALSE?

Accepted Answer

The correct tax rate to use in evaluating a capital budgeting decision is the marginal tax rate, not the firm's average corporate tax rate.

Question 6

Suppose that if GSI drops the price on the Glucoscan 3000 immediately,it can increase sales over the next year by 30% to 130,000 units.The incremental impact of this price drop on the firms EBIT is closest to:

Accepted Answer

The answer of Suppose that if GSI drops the price...

Question 7

The amount that Ford Motor Company will owe in taxes next year with the launch of the new SUV is closest to:

Accepted Answer

A)= (80 - 35)× .30 = 13.5 million

Question 8

Money that has been or will be paid regardless of the decision whether or not to proceed with the project is:

Accepted Answer

A sunk cost is money that has already been spent and cannot be recovered, regardless of the decision made about the project. It is not relevant to the current decision-making process and should not be considered when evaluating the profitability of the project.

Question 9

Which of the following statements is FALSE?

Accepted Answer

The statement B is false because overhead costs that are fixed and will be incurred regardless of whether a project is undertaken or not are not incremental to the project. Incremental cash flows, which are relevant for capital budgeting analysis, are those cash flows that will only occur if the project is accepted. Fixed overhead costs that do not change with the decision to undertake a project should not be included in the project's cash flow analysis.

Question 10

Which of the following statements is FALSE?

Accepted Answer

The statement D is false because unlevered net income is evaluated on a post-tax basis, not pre-tax. Unlevered net income takes into account the revenues, costs, and depreciation but it is calculated after taxes have been deducted.

Question 11

Suppose that of the 60% of FFL's current overnight photo customers,half would start taking their film to a competitor that offers one hour photo processing if FFL fails to offer the one hour service.The level of incremental sales in this case is closest to:

Accepted Answer

If 60% of FFL's current overnight photo customers are affected and half of them switch to a competitor if FFL doesn't offer one hour service, that means 30% of FFL's current overnight photo customers will switch to the competitor if FFL doesn't offer one hour photo processing.

Incremental sales can be calculated by multiplying the percentage of customers who would switch by the revenue from those customers. If FFL's overnight photo processing revenue is $400,000, then the revenue from the 30% of customers who would switch to a competitor without one hour service is:

($400,000 x 30%) / 2 = $60,000

The factor of 2 in the denominator is included because the question states that only half of the affected customers would switch if FFL doesn't offer one hour service, so we need to divide the revenue by 2 to get the incremental sales. Therefore, the closest level of incremental sales is $120,000.

Question 12

A decrease in the sales of a current project because of the launching of a new project is:

Accepted Answer

Cannibalization refers to a situation where sales of an existing product or service decrease because of the launching of a new product or service. It is important to consider cannibalization when evaluating the potential profitability of a new project or investment since it can affect the overall revenue and profitability of the business. Therefore, option A is the correct answer.

Question 13

Which of the following statements is FALSE?

Accepted Answer

The formula provided for unlevered net income is incorrect. The correct formula is UNI = EBIT - taxes. Choice A is true, the straight-line method is a commonly used method for calculating depreciation. Choice B is true, sunk costs are costs that have already been incurred and cannot be recovered. Choice D is true, sunk costs should not be considered when making decisions about whether to continue or abandon a project.

Question 14

The value of currently unused warehouse space that will be used as part of a new capital budgeting project is:

Accepted Answer

The answer of The value of currently unused warehouse space...

Question 15

Which of the following statements is FALSE?

Accepted Answer

Investments in plant, property, and equipment are not directly listed as expense when calculating earnings. Instead, they are capitalized and depreciated over time.

Question 16

Which of the following statements is FALSE?

Accepted Answer

Sunk costs are not incremental and should not be considered in the analysis of a project. The other statements are true.

Question 17

Which of the following statements is FALSE?

Accepted Answer

Sunk cost fallacy is a term used to describe the tendency of people to consider sunk costs in capital budgeting analysis, rather than ignoring them. Therefore, statement C is false. Statements A, B, and D are true.

Question 18

Suppose that if GSI drops the price on the Glucoscan 3000 immediately,it can increase sales over the next year by 30% to 130,000 units.Also suppose that for each Glucoscan monitor sold,GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%.Considering the increase in the sale of testing strips,the incremental impact of this price drop on the firms EBIT is closest to:

Accepted Answer

The answer of Suppose that if GSI drops the price...

Question 19

Which of the following costs would you consider when making a capital budgeting decision?

Accepted Answer

When making a capital budgeting decision, the relevant costs are those that are incremental or differential to the decision being made. Sunk costs, such as those already incurred, cannot be recovered and should not be considered. Interest expense and fixed overhead costs are expenses that will be incurred regardless of the capital budgeting decision and thus should not be considered. Opportunity cost, on the other hand, represents the value of the next best alternative forgone and should be considered as it represents a real cost of choosing one option over another.

Question 20

Which of the following statements is FALSE?

Accepted Answer

The formula provided for calculating income tax is incorrect and does not make sense. The correct formula would depend on various factors such as the tax rate, deductions and credits applicable to the business.

Quiz 8: Fundamentals of Capital Budgeting

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The amount that Ford Motor Company will owe in taxes next year without the launch of the new SUV is closest to:

The level of incremental sales associated with introducing the new one hour photo service is closest to:

Which of the following statements is FALSE?

Suppose that if GSI drops the price on the Glucoscan 3000 immediately,it can increase sales over the next year by 30% to 130,000 units.The incremental impact of this price drop on the firms EBIT is closest to:

The amount that Ford Motor Company will owe in taxes next year with the launch of the new SUV is closest to:

Money that has been or will be paid regardless of the decision whether or not to proceed with the project is:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Suppose that of the 60% of FFL's current overnight photo customers,half would start taking their film to a competitor that offers one hour photo processing if FFL fails to offer the one hour service.The level of incremental sales in this case is closest to:

A decrease in the sales of a current project because of the launching of a new project is:

Which of the following statements is FALSE?

The value of currently unused warehouse space that will be used as part of a new capital budgeting project is:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following costs would you consider when making a capital budgeting decision?

Which of the following statements is FALSE?