Principles of Corporate Finance by Richard Brealey 13th Edition – Test Bank

Principles of Corporate Finance by Richard Brealey 13th Edition – Test Bank

Principles of Corporate Finance, 13e (Brealey)
Chapter 6 Making Investment Decisions with the Net Present Value Rule

1) The important point(s) to remember while estimating the cash flows of a project
A) is that only cash flow is relevant.
B) are cash flow is relevant and always estimate cash flows on an incremental basis.
C) are to always estimate cash flows on an incremental basis and to be consistent in the treatment of inflation.
D) are cash flow is relevant, always estimate cash flows on an incremental basis, and be consistent in the treatment of inflation.

Answer: D
Difficulty: 2 Medium
Topic: Project Evaluation
Learning Objective: 06-01 Applying the Net Present Value Rule
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

2) Preferably, a financial analyst estimates cash flows for a project as
A) cash flows before taxes.
B) cash flows after taxes.
C) accounting profits before taxes.
D) accounting profits after taxes.

Answer: B
Difficulty: 1 Easy
Topic: Project Evaluation
Learning Objective: 06-01 Applying the Net Present Value Rule
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

3) When a firm has the opportunity to add a project that will utilize excess factory capacity (that is currently not being used), which costs should be used to help determine if the added project should be undertaken?
A) Allocated overhead costs
B) Sunk costs
C) Incremental costs
D) Average costs

Answer: C
Difficulty: 2 Medium
Topic: Project Evaluation
Learning Objective: 06-01 Applying the Net Present Value Rule
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

4) A reduction in the sales of existing products caused by the introduction of a new product is an example of
A) incidental effects.
B) opportunity costs.
C) sunk costs.
D) allocated overhead costs.

Answer: A
Difficulty: 2 Medium
Topic: Project Evaluation
Learning Objective: 06-01 Applying the Net Present Value Rule
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation

5) When Honda develops a new engine, the incidental effects might include the following:
A) demand for replacement parts only.
B) demand for replacement parts and profits from the sale of repair services.
C) demand for replacement parts, profits from the sale of repair services, and offer modified or improved versions of the new engine for other uses.
D) demand for replacement parts and offer modified or improved versions of the new engine for other uses.

Answer: C
Difficulty: 2 Medium
Topic: Project Evaluation
Learning Objective: 06-01 Applying the Net Present Value Rule
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation