Answer Choices:
a. True
b. False
Answer: a. True
Question: Suppose a firm’s CFO thinks that an externality is present in a project, but that it cannot be quantified with any precision—estimates of its effect would really just be guesses. In this case, the externality should be ignored—i.e., not considered at all—because if it were considered it would make the analysis appear more precise than it really is.
Answer Choices:
a. True
b. False
Answer: b. False
Question: According to the medical model, the sickness is located in the patient, and the physician of licensed expert has the authority to heal or cure it.
Answer Choices:
True
False
Answer: True
Question: Suppose Walker Publishing Company is considering bringing out a new finance text whose projected revenues include some revenues that will be taken away from another of Walker’s books. The lost sales on the older book are a sunk cost and as such should not be considered in the analysis for the new book.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Changes in net operating working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during every year of a project’s life, other things held constant.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The two methods discussed in the text for dealing with unequal project lives are (1) the replacement chain approach and (2) the present value approach.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Real options can affect the size of a project’s expected NPV but not project’s risk as measured by the standard deviation or coefficient of variation of the NPV.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The following are all examples of real options that are discussed in the text: (1) growth options, (2) flexibility options, (3) timing options, and (4) abandonment options.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Doing multiple t-tests as opposed to one ANOVA can increase our chance of getting significant results even when the results in reality are not significant (type I error).
Answer Choices:
True
False
Answer: True
Question: Sensitivity analysis measures a project’s stand-alone risk by showing how much the project’s NPV (or IRR) is affected by a small change in one of the input variables, say sales. Other things held constant, with the size of the independent variable graphed on the horizontal axis and the NPV on the vertical axis, the steeper the graph of the relationship line, the more risky the project, other things held constant.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The two methods discussed in the text for dealing with unequal project lives are (1) the replacement chain approach and (2) the equivalent annual annuity (EAA) approach.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Although the replacement chain approach is appealing for dealing with mutually exclusive projects that have different lives, it is not used in practice because not projects meet the assumptions the method requires.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The two cardinal rules that financial analysts should follow to avoid errors are: (1) in the NPV equation, the numerator should use income calculated in accordance with generally accepted accounting principles, and (2) all incremental cash flows should be considered when making accept/reject decisions for capital budgeting projects.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Real options are options to buy real assets, especially stocks, rather than interest-bearing assets, like bonds.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the project’s NPV.
e. A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm’s existing stores.
Answer: c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
Question: Psychosocial interventions include the following:
Answer Choices:
Psychoeducation
Skills training
Family involvement
CBT
Answer: True