FINA 361 FINAL UPDATED ACTUAL QUESTIONS AND CORRECT ANSWERS

FINA 361 FINAL UPDATED ACTUAL QUESTIONS AND
CORRECT ANSWERS

Question:
1. Incremental Cash Flows
Answer:
Cash flows that change because of the project (only these matter)

Question:
2. Stand-Alone Principle
Answer:
Evaluate a project as if it were a separate mini-firm

Question:
3. Sunk Cost
Answer:
A cost that has already been incurred ’ always ignored

Question:
4. Opportunity Cost
Answer:
Value of the next best alternative given up always included ’

Question:
5. Cannibalization (Negative Side Effect)
Answer:
When a project reduces sales of an existing product ’ included as a cost

Question:
6. Positive Side Effect
Answer:
When a project increases sales of another product includ- ’ ed as a benefit

Question:
7. Financing Costs
Answer:
Interest, loans, dividends ’ NOT included in project cash flows

Question:
8. Operating Cash Flow (Concept)
Answer:
Cash flow from normal business operations only (no financing)

Question:
9. Depreciation (Concept)

, Answer:
Not a cash flow, but reduces taxes ’ increases cash flow

Question:
10. Depreciation Tax Shield
Answer:
Tax savings created by depreciation

Question:
11. Net Working Capital (NWC)
Answer:
Short-term investment (inventory, cash, receivables)

Question:
12. NWC Initial Investment
Answer:
Cash outflow at the start of a project

Question:
13. NWC Recovery
Answer:
Cash inflow at the end of the project

Question:
14. Capital Spending (CapEx)
Answer:
Money spent on long-term assets (equipment, machines)

Question:
15. Salvage Value
Answer:
Value of an asset at the end of the project

Question:
16. After-Tax Salvage Value
Answer:
Sale value adjusted for taxes (gain taxed, loss gives tax benefit)

Question:
17. Book Value (BV)
Answer:
Value of asset after depreciation

Question:
18. Market Value (MV)