Question 1

A pro forma financial statement is a financial statement that:

Accepted Answer

A pro forma financial statement projects future years' operations based on expected assumptions and scenarios. It is used as a tool for planning and forecasting purposes, and can assist in decision-making regarding new investments or business opportunities. Options A through C are not accurate definitions of a pro forma financial statement, and E is not necessarily true as the valuation method used can vary depending on the purpose of the pro forma statement.

Question 2

Forecasting risk is best defined as:

Accepted Answer

Forecasting risk refers to the potential for error or inaccuracy in estimating future events or outcomes. It is a type of estimation risk, as it involves uncertainty in predicting future conditions. The other choices do not accurately describe the concept of forecasting risk.

Question 3

Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value.What type of analysis is Mark conducting?

Accepted Answer

Mark is conducting sensitivity analysis, which involves analyzing how changes in certain variables (in this case, variable costs per unit) would affect the overall project's net present value. The goal of sensitivity analysis is to identify the most critical variables that can significantly impact the project's success.

Question 4

Kyle Electric has three positive net present value opportunities.Unfortunately,the firm has not been able to find financing for any of these projects.Which one of the following terms best describes the firm's situation?

Accepted Answer

Capital rationing refers to a situation where a firm has opportunities to invest in positive net present value projects, but does not have enough financing to fund all of them. This is the exact situation described in the question. Sensitivity analysis refers to a technique used to determine how changes in one variable can impact the outcome of a project, and is not relevant in this case. Soft rationing refers to situations where a company internally limits funding to specific projects or departments, which is not applicable in this case. Contingency planning refers to preparing for unexpected events, and sunk cost refers to costs that have already been incurred and cannot be recovered, neither of which are relevant in this situation.

Question 5

Contingency planning focuses on the:

Accepted Answer

Contingency planning involves identifying potential risks and developing strategies to address them. This includes identifying managerial options that may need to be implemented in order to mitigate risks or respond to unexpected events. The other options listed are not directly relevant to contingency planning.

Question 6

Lake City Plastics currently produces plastic plates and silverware.The company is considering expanding its product offerings to include plastic serving trays.Which of the following are cash flows relevant to the new product?
I.Molds needed to form the serving trays
II.Projected increase in plate and silverware sales if the trays are produced
III.A portion of the production manager's current annual salary of $75,000
IV.Raw materials used in the production of the serving trays

Accepted Answer

Molds needed for the trays, projected increase in sales, and raw materials are all relevant cash flows related to the new product. The production manager's current salary is not relevant as it is a sunk cost.

Question 7

Which one of the following refers to the option to expand into related businesses in the future?

Accepted Answer

Strategic option refers to the option to expand into related businesses in the future. Contingency option refers to the option to respond to unforeseen events or circumstances. Soft rationing refers to the restriction of funds due to internal management decisions, while hard rationing is due to external factors such as lack of funds or credit. Capital rationing option is not a common term used in business strategy.

Question 8

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

Accepted Answer

Opportunity cost is the cost of the best alternative forgone when a particular investment is chosen.

Question 9

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

Accepted Answer

Erosion refers to the cash flows of a new project that are simply an offset of reduced cash flows for a current project. Essentially, the new project is cannibalizing sales or revenue from the current project. This term is commonly used in situations where a company is considering launching a new product that may compete with its existing products.

Question 10

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns.This lot was purchased four years ago at a cost of $299,000,which the firm paid in cash.To date,the firm has spent another $38,000 on land improvements,all of which was also paid in cash.Today,the lot has a market value of $329,000.What value should be included in the analysis of the expansion project for the cost of the land?

Accepted Answer

The current market value of the land should be used in the analysis because it represents the opportunity cost of using the land for the expansion project.

Question 11

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?

Accepted Answer

A cost that has already been incurred and cannot be recouped is called a sunk cost. It should be ignored when evaluating a project because it cannot be recovered or changed. Therefore, the correct option is E, sunk.

Question 12

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?

Accepted Answer

Changes to a firm's cash flows that result from adding a new project are referred to as incremental cash flows. These incremental cash flows include any additional cash inflows and outflows that will be generated by the new project. This information is critical in determining whether the project will be profitable and if it should be pursued by the firm. Choices A, B, D, and E are not correct terms used to describe changes in a firm's cash flows from a new project.

Question 13

Marcos Enterprises has three separate divisions.The firm allocates each division $1.5 million per year for capital purchases.Which one of the following terms applies to this allocation process?

Accepted Answer

Soft rationing refers to the process of setting limits on available funds for capital investments without completely eliminating any project. In this case, each division is allocated the same amount for capital purchases, indicating a soft limit on the available funds. Hard rationing, on the other hand, involves completely eliminating projects due to a lack of available funds. Opportunity cost refers to the cost of giving up the next best alternative when making a decision. Sunk costs are costs that have already been incurred and cannot be recovered. Strategic planning is the process of defining an organization's strategy and making decisions on allocating its resources to pursue this strategy. None of these terms are applicable to this question.

Question 14

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

Accepted Answer

The term used to describe the reduction in a firm's tax bill as a result of depreciation is depreciation tax shield.

Question 15

The Blackwell Group is unable to obtain financing for any new projects under any circumstances.Which term best applies to this situation?

Accepted Answer

Hard rationing refers to a situation where no financing is available under any circumstances, which matches the given scenario. Contingency planning, sensitivity analysis, and scenario analysis are all methods for dealing with uncertainty or potential risks but do not necessarily involve a complete lack of financing. Soft rationing involves the allocation of limited financing resources, which is not applicable here.

Question 16

Jamie is analyzing the estimated net present value of a project under various what if scenarios.The type of analysis that Jamie is doing is best described as:

Accepted Answer

The scenario analysis involves analyzing the estimated net present value of a project under various what-if scenarios. This analysis helps to identify the potential impact of different future events on the project's financial performance. Sensitivity analysis evaluates the impact of changes in a specific input variable on project outcomes, erosion planning focuses on analyzing revenue loss due to different factors, benefit planning involves identifying and evaluating the benefits of a project, and opportunity evaluation assesses the potential for new opportunities. None of these options fully describe Jamie's analysis.

Question 17

The opportunities that a manager has to modify a project once it has started are called:

Accepted Answer

The term "managerial options" accurately describes the opportunities a manager has to modify a project once it has started. These options can include changes to resources, timelines, goals, and scope, among other factors. While there may be sensitivity choices or scenario adjustments that come into play during the project, these are not specific to the manager's opportunities for modification. Restructuring options and erosion control measures are not relevant to this concept.

Question 18

Which one of the following refers to a method of increasing the rate at which an asset is depreciated?

Accepted Answer

Accelerated cost recovery system (ACRS) is a method of depreciation that allows for a faster rate of depreciation in the earlier years of an asset's life, and a slower rate in later years. This can result in larger tax deductions in the earlier years and a lower tax burden overall.

Question 19

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

Accepted Answer

The stand-alone principle assumes that a project will be evaluated based on its incremental cash flows, or the cash flows that are directly attributable to the project and not influenced by external factors. This principle is important in capital budgeting decisions, as it helps to ensure that a project is evaluated based on its true contributions to the company's bottom line.

Question 20

The Shoe Box is considering adding a new line of winter footwear to its product lineup.Which of the following are relevant cash flows for this project?
I.Decreased revenue from products currently being offered if this new footwear is added to the lineup
II.Revenue from the new line of footwear
III.Money spent to date looking for a new product line to add to the store's offerings
IV.Cost of new counters to display the new line of footwear

Accepted Answer

Decreased revenue from existing products (I) and revenue from the new line (II) are relevant as they affect overall sales. The cost of new counters (IV) is a direct expense for the project. Money already spent (III) is a sunk cost and not relevant.

Quiz 9: Making Capital Investment Decisions