FIN 325 Final Exam Questions with Correct Answers
incremental cash flows Correct Answer-the difference between a firm's
future cash flows with a project and those without the project
stand-alone principle Correct Answer-the assumption that evaluation of
a project may be based on the project's incremental cash flows
sunk cost Correct Answer-a cost that has already been incurred and
cannot be removed and therefore should not be considered in an
investment decision
opportunity cost Correct Answer-the most valuable alternative that is
given up if a particular investment is undertaken
erosion Correct Answer-the cash flows of a new project that come at the
expense of a firm's existing projects
pro forma financial statements Correct Answer-financial statements
projecting future years' operations
operating cash flow Correct Answer-EBIT + depreciation - taxes
accelerated cost recovery system Correct Answer-a depreciation method
under US tax law allowing for the accelerated write-off of property
under various classifications
, equivalent annual cost Correct Answer-the present value of a project's
costs calculated on an annual basis
forecasting risk Correct Answer-the possibility that errors in projected
cash flows will lead to incorrect decisions. Also known as estimation
risk.
scenario analysis Correct Answer-the determination of what happens to
NPV estimates when we ask what-if questions
sensitivity analysis Correct Answer-investigation of what happens to
NPV when only one variable is changed
simulation analysis Correct Answer-a combination of scenario and
sensitivity analysis
variable costs Correct Answer-costs that change when the quantity of
output changes
fixed costs Correct Answer-costs that do not change when the quantity
of output changes during a particular time period
marginal or incremental revenue Correct Answer-the change in revenue
that occurs when there is a small change in output
incremental cash flows Correct Answer-the difference between a firm's
future cash flows with a project and those without the project
stand-alone principle Correct Answer-the assumption that evaluation of
a project may be based on the project's incremental cash flows
sunk cost Correct Answer-a cost that has already been incurred and
cannot be removed and therefore should not be considered in an
investment decision
opportunity cost Correct Answer-the most valuable alternative that is
given up if a particular investment is undertaken
erosion Correct Answer-the cash flows of a new project that come at the
expense of a firm's existing projects
pro forma financial statements Correct Answer-financial statements
projecting future years' operations
operating cash flow Correct Answer-EBIT + depreciation - taxes
accelerated cost recovery system Correct Answer-a depreciation method
under US tax law allowing for the accelerated write-off of property
under various classifications
, equivalent annual cost Correct Answer-the present value of a project's
costs calculated on an annual basis
forecasting risk Correct Answer-the possibility that errors in projected
cash flows will lead to incorrect decisions. Also known as estimation
risk.
scenario analysis Correct Answer-the determination of what happens to
NPV estimates when we ask what-if questions
sensitivity analysis Correct Answer-investigation of what happens to
NPV when only one variable is changed
simulation analysis Correct Answer-a combination of scenario and
sensitivity analysis
variable costs Correct Answer-costs that change when the quantity of
output changes
fixed costs Correct Answer-costs that do not change when the quantity
of output changes during a particular time period
marginal or incremental revenue Correct Answer-the change in revenue
that occurs when there is a small change in output
