Project Evaluation Quiz

What is a relevant cash flow in project evaluation?

• A sunk cost already incurred

• Interest expense on borrowed funds

• Any change in future cash flows caused by the project

• Accrual-based depreciation expense

What is the stand-alone principle in capital budgeting?

• Only include revenues from other projects

• Evaluate each project using net income

• Evaluate a project using its own incremental cash flows

• Include all fixed overheads

Which of the following is considered a sunk cost?

• Market value of land owned

• Consultant fees paid last year

• Salvage value of equipment

• Opportunity cost of using a warehouse

What is erosion in the context of capital investment?

• Revenue gained from side projects

• Cash flow lost from a competing company

• Reduction in existing cash flows due to new project

• Depreciation expense over time

Which of the following is not included in project cash flows?

• Changes in net working capital

• Financing costs

• Capital spending

• Operating cash flows

How is Operating Cash Flow (OCF) calculated in the basic formula?

• EBIT – Taxes + Depreciation

• Net Income + Taxes

• Sales – Variable Costs

• EBIT – Depreciation – Taxes

A project has EBIT of $200, depreciation of $600, and taxes of $42. What is the OCF?

• $200

• $758

• $600

• $158

If a project costs $80,000 and saves $22,000 per year for 5 years (with tax and depreciation), what is this type of analysis called?

• Break-even

• Scenario

• Cost-cutting proposal

• Replacement decision

What is forecasting risk in capital budgeting?

• Lack of financing

• Errors in cost estimation

• Uncertainty in future cash flows

• Currency risk

What is scenario analysis?

• Examining effects of one variable at a time

• Simulation of all cash flows

• Estimating cash flow for pessimistic, base, and optimistic cases

• Ignoring fixed costs in projections