BUS-568 Chap 12 – Flashcards

The most likely scenario in a capital budgeting analysis

A measure of the project's effect on the firm's earnings variability

A method to determine market risk by using the betas of single-product companies in a given industry

The risk that is measured by the project's beta coefficient

A computer-generated probability simulation of the most likely outcome, given a set of probable future events

A successful sushi chain in Hong Kong spent $500,000 to conduct a study on whether to open a location in the United States. The study showed that the best place for the company to open its first location would be in ChicagoChicago. When conducting its capital budget analysis, how should the company account for the cost of the study when estimating the amount of the initial investment that the new store will require?

A cell phone company recently gave customers the ability to buy applications that they can download to their cell phone. Allowing customers to use these applications increased cell phone sales. This is an example of __________ externality.

The effects on other parts of the firm

The cost of not choosing another mutually exclusive project by accepting a particular project.

The cash flows that the asset or project is expected to generate over its life.

The specific cash flows that should be considered in a capital budgeting decision.

A cost that has been incurred and may be related to a project but should not be part of the decision to accept or reject a project

Newcastle Coal Co. owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use the warehouse in a new project. Should Newcastle Coal Co. include the value of the warehouse as part of the initial investment in the new project?

A paper manufacturer has built a plant that meets all government-mandated environmental regulations, but still produces an unpleasant odor when it is being operated. Many residents in the area dislike the paper mill of these unpleasant odors. This is an example of ________ externality.

Marston Manufacturing Company is considering a project that requires an investment in new equipment of $4,200,000, with an additional $210,000 in shipping and installation cost. Marston estimates that its accounts receivable and inventories need to increase by $840,000 to support the new project, some of which is financed by a $336,000 increase in spontaneous liabilities (accounts payable and accruals). The total cost of Marston's new equipment is ___________ and consists of the price of the new equipment plus the ________. In contrast, Marston's initial investment outlay is ________

Suppose Marston's new equipment is expected to sell for $1,200,000 at the end of its four-year useful life, and at the same time, the firm expects to recover all of its net working capital investment. The company chose to use straight-line depreciation, and the new equipment was fully depreciated by the end of its useful life. If the firm's tax rate is 40%, what is the project's total termination cash flow?