Given a project's expected cash flows, it is easy to calculate its NPV, IRR, MIRR, payback, and discounted payback. Cash flows are estimated based on information from various sources. There is uncertainty in a project's forecasted cash flows, and some projects are more uncertain and thus riskier than others.
The most critical step in capital budgeting analysis is (Choices: net income, cash flow, accounting income) estimation.
The key is to focus on only (Choices: relevant net income, incremental accounting income, incremental cash flows) Factors that complicate the analysis are sunk costs, opportunity costs, externalities, changes in net operating working capital, and salvage values.
Give the correct response to each of the following questions.
Which of the following items should be included in the capital
budgeting analysis?
a. Sunk costs
b. Interest payments
c. Dividend payments
d. Opportunity costs
An outlay that was incurred in the past and cannot be recovered
in the future regardless of whether the project under consideration
is accepted is known as
a. Opportunity cost
b. Externality
c. Sunk cost
d. CannibalizationItem
Which of the following is an example of an opportunity
cost?
a. A publisher introduces a new textbook which reduces sales of one
of their existing textbooks.
b. A firm has land that can be used in building a new store. If the
new store is not built, the firm could sell the land for $2 million
(net of taxes).
c. Apple's investment in the iTunes music store boosted sales of
its iPod.
d. The cost of a report done 2 years ago to investigate the
potential of a new plant and the permits required to build
it.
e. Statements a and d are both examples of opportunity costs.
Which of the following is an example of cannibalization?
a. A publisher introduces a new textbook which reduces sales of one
of their existing textbooks.
b. A firm has land that can be used in building a new store. If the
new store is not built, the firm could sell the land for $2 million
(net of taxes).
c. Apple's investment in the iTunes music store boosted sales of
its iPod.
d. The cost of a report done 2 years ago to investigate the
potential of a new plant and the permits required to build
it.
e. Statements c and d are both examples of cannibalization.