Deck 8: Capital Budgeting

Question 1

The overall goal of financial management is to:

A)increase short-term profits.
B)allow the firm to pay regular dividends.
C)increase stock prices.
D)maximize shareholder wealth.

Answer 1

maximize shareholder wealth.

Question 2

In analyzing a foreign project,which is easier to estimate,costs or revenue?

A)Revenue
B)It depends on the project
C)Cost
D)Both are equally easy to estimate

Answer 2

Cost

Question 3

In conducting cash flow analysis,information about production and supply chain are needed to:

A)determine when the expected revenues will be received.
B)select the suppliers who will be used for the project being considered.
C)compute the cost of goods sold.
D)decide where production facilities will be located.

Answer 3

compute the cost of goods sold.

Question 4

What is the difference between "off shoring" and "outsourcing"?

A)Off shoring refers to manufacturing in others countries,while outsourcing refers to buying raw materials in other countries.
B)Off shoring is an activity of MNCs,while outsourcing is an activity of purely domestic firms.
C)Off shoring refers to obtaining foreign labor to work on domestic projects,while outsourcing refers to using contract domestic labor for domestic projects.
D)There is no difference,they are interchangeable terms.

Question 5

In making an outsourcing decision,important considerations for the firm include:

A)the relationship of the supplier to the government of the country where the supplier is located.
B)the supplier's reliability and flexibility to meet changes in demand.
C)the ability of the supplier to move to another country,if necessary.
D)whether the supplier is a corporation or some other kind of business organization.

Question 6

Which involves more risk,outsourcing or foreign production?

A)Foreign production involves more risk.
B)Outsourcing involves more risk.
C)Outsourcing and foreign production are equally risky activities.
D)Outsourcing and foreign production involve different risks,so one is not more risky than the other.

Question 7

Firms often screen potential projects before undertaking a full review by using considerations such as:

A)feasibility and how much the project will cost.
B)how much the project will cost and whether the firm will have to acquire additional resources for the project.
C)feasibility and how the project fits with the firm's strategy.
D)whether the project uses the firm's core competencies and how the project would affect the upper management of the firm.

Question 8

Discounted cash flow analysis relies primarily on _________________ in valuing proposed projects.

A)opportunity costs
B)weighted average cost of capital
C)net present value
D)discounted wealth effect

Question 9

In considering production in a foreign country,a firm must consider risk factors such as:

A)inflation in the price of inputs and losses arising from poor quality production.
B)domestic labor unrest and changes in home-country tax laws.
C)changes in import restrictions and the added costs of bribes that must be paid in the foreign country.
D)WTO rulings and requirements of other international trade agreements.

Question 10

Why would a firm establish a sales and service infrastructure in a country where it wanted to sell its products?

A)Establishing an infrastructure in a country is the easiest way to develop a market for the products in that country.
B)Establishing an infrastructure in a country may be necessary if the product being sold requires after-sale service.
C)Establishing an infrastructure in a country is a long-term strategy that promises the most success for the firm.
D)Establishing an infrastructure in a country is the only way to gain the exposure necessary to successfully sell the firm's products.

Question 11

What is usually the most important factor in the outsourcing decision?

A)The revenue that the decision will generate
B)How upper management views the decision
C)Whether the firm has pre-existing relationships in the region
D)The cost savings that will result from the decision

Question 12

Typically,______________________ are arrangements in which an MNC agrees to undertake a project in a foreign country in conjunction with local firms and to share both the responsibilities and profits involved in the project.

A)partnerships
B)joint venture agreements
C)trade agreements
D)sale and manufacture agreements

Question 13

What are the trends in outsourcing?

A)The scope of outsourcing is declining.
B)The scope of outsourcing is expanding.
C)The scope of outsourcing is remaining constant.
D)Outsourcing is being replaced by off shoring.

Question 14

In many cases,firms considering projects in foreign countries will:

A)produce and sell its product in the foreign country as its first operation in that foreign country.
B)negotiate contracts with the government of the foreign country before conducting any operations in the foreign country.
C)sell its product in a foreign country first and then consider starting production of its product in that foreign country.
D)produce its product in a foreign country and then consider selling its product in that foreign country.

Question 15

What is meant by the statement that international projects are often "strategic" in nature?

A)Firms often undertake a small project in a foreign country to learn about the foreign country and market before making a larger commitment to that country and market.
B)A foreign investment has to be part of a firm's larger business strategy.
C)Firms often consider projects in other countries from a strategic or broad view rather than concentrating on the tactical or detailed aspects of the project.
D)Firms that do not have a strategy before undertaking a project in a foreign market cannot be successful.

Question 16

In conducting cash flow analysis,key inputs are market demand and prices because:

A)market demand and prices are fixed and cannot be changed.
B)revenues and cost estimates are based on these forecasts.
C)market demand and prices are easily determined.
D)this information indicates what markets firms should target.

Question 17

What benefit can the CFO of a firm contribute to the process of considering and selecting new projects for the firm to pursue?

A)The CFO is the second most powerful position in a firm,and the backing of the CFO can ensure the success of a project.
B)The CFO has a view of the firm as a whole and can understand how a proposed project fits into the firm's overall strategy and how a proposed project can add value to the firm.
C)The CFO makes the final decision on the expenditure of funds by the firm,so the CFO has to approve of a new project if it is going to go forward.
D)The CFO is ultimately responsible for the success or failure of projects,so the CFO has to approve a project before it can be undertaken.

Question 18

The cost associated with a project in a foreign country involves not only the labor rates but also:

A)legal restrictions on labor in the country where the project will take place.
B)how long the project will last.
C)whether the firm has already spent some money on the project.
D)the employment policies of the firm.

Question 19

Projects that involve selling in foreign countries are:

A)more difficult to analyze than projects that involve foreign production because more factors have to be considered and there is more opportunity for error in the analysis.
B)easier to analyze than projects that involve foreign production because all that has to be estimated for projects involving sale is sales revenue.
C)analyzed in the same way that projects involving foreign production are analyzed using the same factors in the analysis of both activities.
D)analyzed differently from projects that involve foreign production,but the same factors are considered in the analysis of both activities.

Question 20

Expanding sales to new markets in foreign countries can benefit MNCs not only by increasing revenues,but also by:

A)increasing the selection of products offered.
B)decreasing the need to expand domestic markets.
C)increasing access to foreign subsidies for new production facilities.
D)decreasing costs as a result of economies of scale.

Question 21

_____________________ are the taxes that a subsidiary must pay to its host country when the subsidiary pays dividends to its parent MNC.

A)Reparation taxes
B)Excess profit taxes
C)Income taxes
D)Withholding taxes

Question 22

What effect does the NPV of a project have on the value of the firm undertaking the project?

A)The firm's value increases or decreases by the NPV of the project.
B)The value of a firm is not affected by the NPV of the projects it undertakes.
C)The firm's value increases but cannot decrease because of the NPV of a project.
D)The firm's value increases by an amount equal to the NPV of a project times the firm's effective tax rate.

Question 23

What effect does the cash flow from foreign projects have on the NPV calculation?

A)NPV calculations are not possible if the cash flow is to be received in a foreign currency.
B)NPV calculations are not affected by the currency in which the cash flow is received.
C)NPV calculations for foreign projects have to consider currency values at the times that cash flow from the projects will be received.
D)The discount rate used in NPV calculations takes into account the value of currencies in which cash flow is received.

Question 24

The key input in an NPV calculation is:

A)project cash flow over the period of the project.
B)project cash flow for the first year of the project.
C)initial investment necessary to begin the project.
D)total investment necessary for the project.

Question 25

Why is there generally more variation in organizational form in foreign projects compared to domestic projects?

A)Firms are freer to experiment with organizational forms in dealing with foreign projects than they are with domestic projects.
B)Since most international projects are in the form of joint ventures,the joint venture agreements dictate the organizational form of the foreign project.
C)Host-country business regulations and tax laws in both home-countries and host-countries result in more variation in the organization of foreign projects.
D)Host-countries generally dictate that the organizational form of the foreign project has to be different from the organizational form of the firm that is operating the foreign project.

Question 26

How is net operating income after taxes calculated?

A)(Revenue - Expenses - Depreciation)x (1 - Tax Rate)
B)(Revenue - Expenses)x (1 - Tax Rate)
C)(Revenue - Expenses - Depreciation)x (Tax Rate)
D)(Revenue - Expenses)x (Tax Rate)

Question 27

The components of country risk include:

A)currency risk,interest rate risk,and political risk.
B)political risk,regulatory risk,and economic risk.
C)nationalization risk,insurgency risk,and policy risk.
D)economic risk,conversion risk,and transaction risk.

Question 28

In most projects,the typical unit sales forecast will:

A)increase initially and decrease toward the end of the project.
B)remain constant throughout the project.
C)increase initially and then remain constant until the end of the project.
D)increase steadily until the end of the project.

Question 29

The most important variable in determining cash flow and the variable that affects most other cash flow variable is:

A)price of the units predicted to be sold.
B)number of units of product predicted to be sold.
C)number of units of product sold in the previous period.
D)average number of units of product sold in the last year.

Question 30

What are real options in the context of foreign projects?

A)Real options are the fixed parameters of a project that the firm has agreed to follow as the project develops.
B)Real options are flexible parameters in projects that allow firms to take certain actions when and if conditions are advantageous for the firm.
C)Real options represent the actual return that the firm will receive from a project after the inflation rate is considered.
D)Real options are all of the possible outcomes that can result form a project.

Question 31

The "interest rate" that a firm uses to determine the present value of cash flow is either:

A)the discount rate or the opportunity cost of capital.
B)the opportunity cost of capital or the average cost of capital.
C)the discount rate or the weighted average cost of capital.
D)the prime rate or the opportunity cost of capital.

Question 32

What is the difference between a foreign subsidiary of an MNC and a foreign joint venture?

A)A foreign subsidiary is a separate organization in a foreign country in which the MNC has a partial interest,and a foreign joint venture is an organization in a foreign country in which the MNC is a partner.
B)A foreign subsidiary is a separate organization in a foreign country that is wholly owned by the MNC,while a foreign joint venture is an organization in a foreign country in which the MNC owns less than 100 percent.
C)A foreign subsidiary of an MNC and a foreign joint venture are essentially the same kinds of organization and the MNC owns each kind of organization completely.
D)A foreign subsidiary is an office of the MNC but is not a separate organization,and a foreign joint venture is a separate foreign organization owned by the MNC.

Question 33

From the standpoint of cash flow,what is the most obvious difference between domestic and foreign projects?

A)The cash flow from domestic projects is much more certain than it is from foreign projects.
B)Cash flow from foreign projects is usually much larger than it is from domestic projects.
C)Cash flow from domestic projects is received much quicker than cash flow from foreign projects is received.
D)Domestic projects typically produce cash flow in the domestic currency,while foreign projects produce cash flow in the currency of the foreign country and may even produce cash flow in multiple currencies.

Question 34

In an NPV calculation,the final cash flow is typically the:

A)final payment on the investment in the assets used in the project.
B)proceeds from the sale of the last products produced by the project.
C)salvage value obtained by the firm by selling the remaining assets of the project.
D)tax credits that the firm earns through the investment in the project.

Question 35

Two common organizational forms of foreign projects are:

A)joint ventures and outsourcing.
B)outsourcing and foreign branches of an MNC.
C)foreign subsidiaries of an MNC and outsourcing.
D)foreign branches of an MNC and foreign subsidiaries of an MNC.

Question 36

The least difficult aspect of the cash flow calculation is:

A)determining the profit that the firm can expect from the project.
B)determining the tax consequences of the project to the firm.
C)estimating the direct operating expenses that the project will require.
D)estimating the initial investment that the firm has to make in the project.

Question 37

Sensitivity analysis considers how NPV responds to:

A)increased country risk.
B)changes in input values.
C)changes in output values.
D)increased competition.

Question 38

In calculating cash flow,the price of the product to be sold depends on:

A)world economic trends and country-specific trends.
B)prices of competing products and the inflation rate.
C)macroeconomic factors and industry-level factors.
D)country-specific economic factors and production capacity of the firm.

Question 39

____________________________ is a figure that represents a firm's overall cost of financing or its opportunity cost of capital.

A)Discounted cash flow
B)Net present value
C)Wealth effect
D)Weighted average cost of capital

Question 40

In connection with a foreign project,reparation schedule refers to:

A)the timing of the investments that the MNC is required to make for the project.
B)when the payments due to the foreign government from the project will be made.
C)the timing of the cash flow from the project transmitted to the MNC.
D)when the MNC will recover its investment in the project in full.

Question 41

Buying currency options with strike prices that approximate the break-even value of currencies for a project is an appropriate currency risk management tool,but:

A)option strike prices are often not available for the break-even value of currencies.
B)option strike prices cannot be established before the option date arrives.
C)option premiums for such options may be prohibitively high.
D)option premiums are only determined after the options are obtained,so the cost of options are variable.

Question 42

What is decentralization and what does it mean for MNCs?

Question 43

How can firms incorporate country risk into their NPV calculations?

A)Country risk can be addressed by adjustments to discount rates or adjustments to cash flow assumptions.
B)Country risk is not considered in NPV calculations.
C)The discount rate used in NPV calculations automatically incorporates country risk.
D)Country risk can be incorporated by increasing the operating cost of the project.

Question 44

Regulatory actions that impose additional costs on MNCs are considered to be:

A)economic risks.
B)macro-level country risks.
C)industry-specific risks.
D)political risks.

Question 45

How is NPV calculated and what information does NPV provide to a firm?

Question 46

______________________ are much more serious in developing countries and pose significant risks to MNCs.

A)Political risks
B)Transaction risks
C)Economic risks
D)Conversion risks

Question 47

What three taxes might be incurred when an MNC conducts a project through a foreign subsidiary?

Question 48

What are the components of country risk?

Question 49

________________________________ identifies the minimum inputs into a project that are necessary to produce positive NPV.

A)Sensitivity analysis
B)NPV analysis
C)Profit analysis
D)Break-even analysis

Question 50

How can firms stabilize their cash flow by pursuing foreign projects?