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| 1 | |
The manager of Home Food Sales is trying to decide whether or not the firm should repair one of its delivery trucks. The chief mechanic has stated that "It would be a waste of money not to repair it because we just spent $2,200 on repairs last month." What is the major problem with this argument? |
| | A) | It ignores the opportunity cost of the money that has been spent. |
| | B) | It includes sunk costs in the decision. |
| | C) | It includes opportunity costs in the decision. |
| | D) | It includes changes in net working capital. |
| | E) | It includes financing costs in the decision. |
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| 2 | |
It is important to identify and use only incremental cash flows in capital investment decisions: |
| | A) | because they are simple to identify. |
| | B) | only when allocated costs are present. |
| | C) | because ultimately it is the change in a firm's overall future cash flows that matter. |
| | D) | in order to accommodate unforeseen changes that might occur. |
| | E) | whenever sunk costs are involved. |
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| 3 | |
Incremental cash flows should include the:
I. sunk costs.
II. opportunity costs.
III. erosion effects.
IV. effects of synergy. |
| | A) | I and II only |
| | B) | I, III, and IV only |
| | C) | II and III only |
| | D) | II, III, and IV only |
| | E) | I, II, III, and IV |
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| 4 | |
Boyd and Sons purchased 14.5 acres of industrial property 2 years ago at a cost of $1.1 million. Since that time, the firm has spent $220,000 on land improvements such that the current market value of the land is estimated at $1.45 million. The operations manager has been assigned the task of analyzing the construction of a new manufacturing plant located on that site. This manager has developed cost estimates for the building and its contents of $24.6 million along with $1.1 million for additional land improvements and site preparation. Based on this information, the financial manager should estimate the initial cash flow for the plant project as _____ million. |
| | A) | $25.70 |
| | B) | $25.92 |
| | C) | $26.05 |
| | D) | $27.02 |
| | E) | $27.15 |
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| 5 | |
A.B. Cooper purchased a piece of land 3 years ago for $124,000 and subsequently added $68,000 in improvements. There are two options for future use of the land: 1) the land can be sold today for $213,000 aftertax; or 2) your company can destroy the past improvements and build a factory on the land. When evaluating the factory option, what amount, if any, should be included for the use of the land? |
| | A) | $0 |
| | B) | $124,000 |
| | C) | $145,000 |
| | D) | $192,000 |
| | E) | $213,000 |
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| 6 | |
Which one of the following is least likely to cause erosion? |
| | A) | A gas station owner expands his building to make room for a convenience store. |
| | B) | You begin selling coffee in single-serving foil pouches along side your regular-sized cans. |
| | C) | You build a Taco Heaven just down the street from the Chili Dog Haven you own. |
| | D) | Your grocery store begins to carry additional flavors of ice cream. |
| | E) | The concession stand at the local ball field begins to sell both hot dogs and hamburgers, rather than just hot dogs. |
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| 7 | |
Over the past five years, your company scientists spent $3.6 million developing a new engine additive which they recently began marketing. Today, those same scientists have proven that the additive can also be used as a cleaning fluid if additional chemicals are added to the mixture. As the financial manager of the firm, you are being assigned the task of determining whether or not the cleaning fluid should be produced and sold. For your analysis, the original $3.6 million R&D costs should be treated as: |
| | A) | a cash outflow at time T = -5. |
| | B) | an annual operating cost of $.72 million for each of the next 5 years. |
| | C) | an annual cash outflow of $.72 million for each of the past 5 years. |
| | D) | an opportunity cost and included as a cash outflow at time T = 0. |
| | E) | a sunk cost, and therefore excluded from the analysis. |
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| 8 | |
Your company currently manufactures the "Priced Right" line of golf clubs. The board of directors wants you to look at replacing that line with a new "Straight Hit" line of clubs. Which one of the following should NOT be included in your analysis of the proposed "Straight Hit" project? |
| | A) | $400,000 drop in sales from terminating the "Priced Right" line of clubs |
| | B) | $150,000 market value of land currently owned by the firm that will be used for the project |
| | C) | $200,000 already spent on research and development to create the new line of clubs |
| | D) | $350,000 you will pay to Fred Frimstone to promote your new clubs |
| | E) | $125,000 you expect to receive from selling the equipment used to produce the "Priced Right" clubs |
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| 9 | |
Brett is deciding whether or not to drop one of the college courses in which he is currently enrolled. If he drops the course, he will forfeit half of the money spent on tuition. However, by dropping the course, he can increase the number of hours he works each week. Which of the following statements is accurate based on Brett's situation?
I. Remaining in the class incurs an opportunity cost equal to Brett's foregone wages.
II. The tuition is irrelevant to the decision because it is a sunk cost.
III. The time and energy put into the course thus far is a sunk cost. |
| | A) | I only |
| | B) | I and II only |
| | C) | I and III only |
| | D) | II and III only |
| | E) | I, II, and III |
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| 10 | |
When evaluating a capital budgeting project, you ignore all cash flows of the firm except those that change when a project is implemented. The cash flows you are trying to isolate are referred to as: |
| | A) | capital expenditures. |
| | B) | operating cash flows. |
| | C) | incremental cash flows. |
| | D) | allocated costs. |
| | E) | opportunity costs. |
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