Question 1

Depreciation is considered to be an outflow of cash since the cash must be drawn from somewhere.

Accepted Answer

A) True 
 B)False  False

Question 2

Which three of the following statements accurately relate to profits and cash flows?

Accepted Answer

A)  Project planning decisions should be focused primarily on a search for profit. 
B)  Profit is a poor substitute for cash flow. 
C)  Depreciation is not a cash flow and should be excluded from profit figures. 
D)  Working capital adjustments may be needed to modify profit figures for NPV analysis. 
A)  Project planning decisions should be focused primarily on a search for profit. 
B)  Profit is a poor substitute for cash flow. 
C)  Depreciation is not a cash flow and should be excluded from profit figures. 
D)  Working capital adjustments may be needed to modify profit figures for NPV analysis. B, C, D

Question 3

An asset has a purchase cost £100,000, incurred installation costs of £10,000, and has an estimated salvage value of zero, is being depreciated over a 5- year period on a straight- line basis. What is the depreciation expense in year 1?

Accepted Answer

A)  £12,750 
B)  £11,250 
C)  £15,000 
D)  £22,000 
A)  £12,750 
B)  £11,250 
C)  £15,000 
D)  £22,000 D

Question 4

What is meant by the term 'opportunity costs'?

Accepted Answer

A)  The cost of investigating an opportunity 
B)  The interest payable on borrowing funds to take up an opportunity 
C)  The cost of using an asset which has alternative employment 
D)  The income from using an asset 
A)  The cost of investigating an opportunity 
B)  The interest payable on borrowing funds to take up an opportunity 
C)  The cost of using an asset which has alternative employment 
D)  The income from using an asset

Question 5

Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called

Accepted Answer

A)  opportunity costs foregone. 
B)  sunk costs. 
C)  incremental past expenses. 
D)  incremental historical costs. 
A)  opportunity costs foregone. 
B)  sunk costs. 
C)  incremental past expenses. 
D)  incremental historical costs.

Question 6

Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included as relevant in computing a project's incremental cash flows.

Accepted Answer

A) True 
 B)False

Question 7

The relevant cash flows for a proposed capital expenditure are the incremental after- tax cash outflows and resulting subsequent inflows.

Accepted Answer

A) True 
 B)False

Question 8

Opportunity costs should be included as cash flows when determining a project's incremental cash flows.

Accepted Answer

A) True 
 B)False

Question 9

Cash flows that could be realised from the best alternative use of an owned asset are called

Accepted Answer

A)  incremental costs. 
B)  lost resale opportunities. 
C)  sunk costs. 
D)  opportunity costs. 
A)  incremental costs. 
B)  lost resale opportunities. 
C)  sunk costs. 
D)  opportunity costs.

Question 10

An opportunity cost is a cash flow that could be realised from the best alternative use of an owned asset.

Accepted Answer

A) True 
 B)False

Question 11

A business has an initial value of £2m. In the following four years its value is assessed as £2.4m, £2.7m, £2.76m, and £2.8m. The discount rate is 15 per cent. At the end of which year should the business be sold?

Accepted Answer

A)  Year 1 
B)  Year 2 
C)  Year 3 
D)  Year 4 
A)  Year 1 
B)  Year 2 
C)  Year 3 
D)  Year 4

Question 12

Which of the following statements correctly relates to project appraisal?

Accepted Answer

A)  The effect of a new project on other parts of a business is irrelevant when trying to decide whether to go ahead with the new project. 
B)  Changes in working capital as a result of implementing a project should be included in the project appraisal. 
C)  Depreciation is a legitimate cost of a project and should be included in a project appraisal. 
D)  The costs of surveys and feasibility studies incurred prior to the decision to implement a project should be included in the project appraisal, as they are a cost of the project. 
A)  The effect of a new project on other parts of a business is irrelevant when trying to decide whether to go ahead with the new project. 
B)  Changes in working capital as a result of implementing a project should be included in the project appraisal. 
C)  Depreciation is a legitimate cost of a project and should be included in a project appraisal. 
D)  The costs of surveys and feasibility studies incurred prior to the decision to implement a project should be included in the project appraisal, as they are a cost of the project.

Question 13

When evaluating a proposed project, incremental operating cash inflows are relevant cash flows.

Accepted Answer

A) True 
 B)False

Question 14

The change in net working capital when evaluating a capital budgeting decision is

Accepted Answer

A)  the change in current assets minus the change in current liabilities. 
B)  the change in current liabilities minus the change in current assets. 
C)  the increase in current liabilities. 
D)  the increase in current assets. 
A)  the change in current assets minus the change in current liabilities. 
B)  the change in current liabilities minus the change in current assets. 
C)  the increase in current liabilities. 
D)  the increase in current assets.

Question 15

Which of the following factors should form the primary focus of project analysis?

Accepted Answer

A)  Incremental profit figures 
B)  Incremental cash flows 
C)  Allocated overheads 
D)  Raw cash flows 
A)  Incremental profit figures 
B)  Incremental cash flows 
C)  Allocated overheads 
D)  Raw cash flows

Question 16

"Profit is a poor substitute for cash flow." Which two of the following examples accurately apply to that statement?

Accepted Answer

A)  Profit only affects incremental aspects of cash flow. 
B)  Profit rather than cash flow is crucial for long term increases in investor value. 
C)  Working capital adjustments may be needed to modify the profit figures for NPV analysis. 
D)  Depreciation is not a cash flow and should be excluded. 
A)  Profit only affects incremental aspects of cash flow. 
B)  Profit rather than cash flow is crucial for long term increases in investor value. 
C)  Working capital adjustments may be needed to modify the profit figures for NPV analysis. 
D)  Depreciation is not a cash flow and should be excluded.

Question 17

is a series of equal annual cash flows.

Accepted Answer

A)  A conventional 
B)  A mixed stream 
C)  A non- conventional 
D)  An annuity 
A)  A conventional 
B)  A mixed stream 
C)  A non- conventional 
D)  An annuity

Question 18

Accounting figures and cash flows are not necessarily the same due to the presence of certain non- cash expenditures on the firm's income statement.

Accepted Answer

A) True 
 B)False

Question 19

In which two ways may double counting occur when considering interest on borrowing to finance a project?

Accepted Answer

A)  As discounted cash flow and as an element in profits 
B)  As cash flow and as an element in profits 
C)  As cash flow and as an element in the discount rate 
D)  As sunk costs and as an element in the discount rate 
A)  As discounted cash flow and as an element in profits 
B)  As cash flow and as an element in profits 
C)  As cash flow and as an element in the discount rate 
D)  As sunk costs and as an element in the discount rate

Question 20

What is meant by the term 'sunk costs'?

Accepted Answer

A)  Costs of appraising a project's viability 
B)  Costs that will be lost if the project is a failure 
C)  Costs which will not change, regardless of the decision to proceed with a project 
D)  Costs that have already been spent on a project 
A)  Costs of appraising a project's viability 
B)  Costs that will be lost if the project is a failure 
C)  Costs which will not change, regardless of the decision to proceed with a project 
D)  Costs that have already been spent on a project

Exam 3: Project Appraisal: Cash Flow and Applications

Depreciation is considered to be an outflow of cash since the cash must be drawn from somewhere.

Which three of the following statements accurately relate to profits and cash flows?

An asset has a purchase cost £100,000, incurred installation costs of £10,000, and has an estimated salvage value of zero, is being depreciated over a 5- year period on a straight- line basis. What is the depreciation expense in year 1?

What is meant by the term 'opportunity costs'?

Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called

Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included as relevant in computing a project's incremental cash flows.

The relevant cash flows for a proposed capital expenditure are the incremental after- tax cash outflows and resulting subsequent inflows.

Opportunity costs should be included as cash flows when determining a project's incremental cash flows.

Cash flows that could be realised from the best alternative use of an owned asset are called

An opportunity cost is a cash flow that could be realised from the best alternative use of an owned asset.

A business has an initial value of £2m. In the following four years its value is assessed as £2.4m, £2.7m, £2.76m, and £2.8m. The discount rate is 15 per cent. At the end of which year should the business be sold?

Which of the following statements correctly relates to project appraisal?

When evaluating a proposed project, incremental operating cash inflows are relevant cash flows.

The change in net working capital when evaluating a capital budgeting decision is

Which of the following factors should form the primary focus of project analysis?

"Profit is a poor substitute for cash flow." Which two of the following examples accurately apply to that statement?

is a series of equal annual cash flows.

Accounting figures and cash flows are not necessarily the same due to the presence of certain non- cash expenditures on the firm's income statement.

In which two ways may double counting occur when considering interest on borrowing to finance a project?

What is meant by the term 'sunk costs'?

The Financial World

Project Appraisal: Net Present Value and Internal Rate of Return

The Decision-Making Process for Investment Appraisal

Project Appraisal: Capital Rationing, Taxation and Inflation

Risk and Project Appraisal

Portfolio Theory

The Capital Asset Pricing Model and Multi-Factor Models

Stock Markets

Raising Equity Capital

Long-Term Debt Finance

Short-Term and Medium-Term Finance

Stock Market Efficiency

Value-Based Management

Value-Creation Metrics

The Cost of Capital

Valuing Shares

Capital Structure

Dividend Policy

Mergers

Derivatives

Managing Exchange-Rate Risk

Future Value of 1 at Compound Interest

Present Value of 1 at Compound Interest

Present Value of an Annuity of 1 at Compound Interest

Filters