Exam 10: Project Cash Flows and Risk

Allmax is concerned that its subsidiary in Venezuela could be expropriated (seized) by the host government without compensation within the next few years. The type of risk Allmax faces with its Venezuelan subsidiary is termed ______ risk. 

Which of the following mathematical expressions can be used to compute the supplemental operating cash flows? (Δ = delta, which indicates the change in something; t = Period t)

To expand sales, Sandine Corporation is evaluating whether to purchase a machine to manufacture a new product line. Which of the following statements is correct concerning an expansion analysis like the one Sandine faces?

Stonewood Manufacturing is evaluating whether to replace one of its existing machines with a new, more technologically advanced one. Which of the following statements concerning a replacement decision analysis is correct?

A sunk cost is a cash outlay that has already been incurred. But, it is a cost that can be recovered if a capital budgeting project is purchased. Consequently, these sunk costs are extremely important in capital budgeting analyses. 

Carolina Insurance Company is considering the purchase of a fire insurance company. The fire insurance company has a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the required rate of return that should be used to evaluate the insurance company is _____. 

Quantification of risk is difficult, and there are different types of risks, such as stand-alone risk, market risk, and political risk, associated with capital budgeting projects. Sensitivity analysis is a good technique to use when measuring market risk, but not when measuring stand-alone risk. 

A firm is evaluating a new machine to replace one of its existing, older machines. If the old machine is replaced, the change in the annual depreciation expense will be $3,000. The firm's marginal tax rate is 30 percent. Which of the following statements is correct?

Investment in foreign subsidiaries is less risky when:

Which of the following statements is correct?

A firm is considering the purchase of an asset whose stand-alone risk is greater than the average risk of its existing portfolio of assets. In evaluating this asset, the decision maker should:

Klott Company used scenario analysis to evaluate a capital budgeting project. The analysis generated a net present value (NPV) equal to $10,500 and a standard deviation (σ) equal to $12,083. The project's coefficient of variation (CVNPV) is _____. 

Monte Carlo simulation:

Which of the following statements about capital budgeting analyses is correct?

If a capital budgeting project has a higher corporate risk than the average risk contained in the firm's portfolio of assets, it generally has a:

A key difference between a replacement project analysis and an expansion project analysis is that the net present value (NPV) technique that is used to evaluate capital budgeting projects should only be used to evaluate expansion projects, whereas either the NPV technique or the internal rate of return (IRR) technique can be used to evaluate replacement projects. 

Which of the following should be included in the computation of an expansion project's terminal cash flow?

Triblaze Corp. is considering buying a new truck. The cost of the truck is $62,000 (the only initial investment outlay), and the cash savings the new truck is expected to generate during its life are $19,920, $22,800, and $31,280, respectively. Trailblaze's required rate of return is 10 percent. The net present value (NPV) of the truck is _____. 

A major difference between capital budgeting for domestic operations and foreign operations is that:

Zinc Corp. is planning to purchase a new machine. The initial investment outlay is expected to be $40,000, and the annual supplemental operating cash flows that the machine is expected to generate during its three-year life are $11,000, $15,000, and $18,000, respectively. The company's required rate of return is 9 percent. Which of the following statements is correct about the machine's net present value (NPV) and the decision of Zinc Corp. should make?