Healthcare Finance Final UPDATED Exam
Questions and CORRECT Answers
Incremental cash flows - Correct Answer- flows that are properly included in a capital
investment analysis
cash flows in each period if the project is undertaken minus the firm's cash flows if the
project is not undertaken
Terminal value - Correct Answer- the cash flow assigned to the last year on the time line of a
long- life project to account for the value lost because the cash flows were truncated
Salvage value - Correct Answer- the estimated value of an asset at the end of its useful life
Sunk cost - Correct Answer- a cost that has already occurred or is irrevocably committed.
Sunk costs are nonimcremental to capital investment analyses and hence should not be
included
Opportunity cost - Correct Answer- the cost associated with alternative uses of the same
asset. for example, if land is used for one project than it is no longer available for other uses,
and hence the opportunity cost arises
Strategic value - Correct Answer- the value inherent in a capital investment that is not
captured in its cash flow estimates. for example, a project may provide a foot in the door in a
new service area that could lead to other profitable investments
Cash flow estimation bias - Correct Answer- the most critical and most difficult part of the
capital investment and analysis process
Risk- free investment - Correct Answer- an investment that has a guaranteed (sure) return. in
other words, the probability of earning the return expected is 100 percent
Financial risk - Correct Answer- capital investments are risky because a project's cash flows
are not known with certainty when the project is being analyzed
, Sensitivity analysis - Correct Answer- classified as a risk assessment tool, the process of
assessing how changes in one variable affect another variable
Risk- adjusted discount rate (RADR) - Correct Answer- a risk adjustment method that
changes the discount (opportunity cost) rate to reflect the unique riskiness of the project being
analyzed
Base case - Correct Answer- in a capital investment analysis, the situation that is expected to
occur
Scenario analysis - Correct Answer- a risk assessment technique that overcomes the problems
associated with sensitivity analysis
Qualitative risk assessment - Correct Answer- a process for assessing project risk that focuses
on qualitative factors as opposed to a statistical analysis of profit variability
Project cost of capital - Correct Answer- the discount rate that reflects the unique riskiness of
the project being analyzed
Capital budget - Correct Answer- a plan (budget) that outlines a buisness's expected future
expenditures on new capital assets, such as land, buildings and equipment
Capital rationing - Correct Answer- the condition of having more acceptable projects than
funds (capital) needed to undertake those projects
Balance sheet - Correct Answer- one of the three primary financial statements. reports the
financial position of a buisness at a single point in time
Basic accounting equation - Correct Answer- the relationship between balance sheet accounts
that requires the balance sheet to balance. that is, total assets must equal total liabilities plus
equity
Current assets - Correct Answer- cash and other assets that are expected to be converted into
cash within one accounting period (often a year). examples of non cash current assets include
cash equivalents, short term investments, receivables, and inventories
Questions and CORRECT Answers
Incremental cash flows - Correct Answer- flows that are properly included in a capital
investment analysis
cash flows in each period if the project is undertaken minus the firm's cash flows if the
project is not undertaken
Terminal value - Correct Answer- the cash flow assigned to the last year on the time line of a
long- life project to account for the value lost because the cash flows were truncated
Salvage value - Correct Answer- the estimated value of an asset at the end of its useful life
Sunk cost - Correct Answer- a cost that has already occurred or is irrevocably committed.
Sunk costs are nonimcremental to capital investment analyses and hence should not be
included
Opportunity cost - Correct Answer- the cost associated with alternative uses of the same
asset. for example, if land is used for one project than it is no longer available for other uses,
and hence the opportunity cost arises
Strategic value - Correct Answer- the value inherent in a capital investment that is not
captured in its cash flow estimates. for example, a project may provide a foot in the door in a
new service area that could lead to other profitable investments
Cash flow estimation bias - Correct Answer- the most critical and most difficult part of the
capital investment and analysis process
Risk- free investment - Correct Answer- an investment that has a guaranteed (sure) return. in
other words, the probability of earning the return expected is 100 percent
Financial risk - Correct Answer- capital investments are risky because a project's cash flows
are not known with certainty when the project is being analyzed
, Sensitivity analysis - Correct Answer- classified as a risk assessment tool, the process of
assessing how changes in one variable affect another variable
Risk- adjusted discount rate (RADR) - Correct Answer- a risk adjustment method that
changes the discount (opportunity cost) rate to reflect the unique riskiness of the project being
analyzed
Base case - Correct Answer- in a capital investment analysis, the situation that is expected to
occur
Scenario analysis - Correct Answer- a risk assessment technique that overcomes the problems
associated with sensitivity analysis
Qualitative risk assessment - Correct Answer- a process for assessing project risk that focuses
on qualitative factors as opposed to a statistical analysis of profit variability
Project cost of capital - Correct Answer- the discount rate that reflects the unique riskiness of
the project being analyzed
Capital budget - Correct Answer- a plan (budget) that outlines a buisness's expected future
expenditures on new capital assets, such as land, buildings and equipment
Capital rationing - Correct Answer- the condition of having more acceptable projects than
funds (capital) needed to undertake those projects
Balance sheet - Correct Answer- one of the three primary financial statements. reports the
financial position of a buisness at a single point in time
Basic accounting equation - Correct Answer- the relationship between balance sheet accounts
that requires the balance sheet to balance. that is, total assets must equal total liabilities plus
equity
Current assets - Correct Answer- cash and other assets that are expected to be converted into
cash within one accounting period (often a year). examples of non cash current assets include
cash equivalents, short term investments, receivables, and inventories
