MBA 621 Sample Questions & Answers
Verified 100% Correct
I, II and IV only
Which of the following statements is/are true?I) We begin the capital budgeting process by
determining the incremental earnings of a project.II) The marginal corporate tax rate is the
tax rate the firm will pay on an incremental dollar of pre-tax income.III) Investments in plant,
property, and equipment are directly listed as expense when calculating earnings.IV) The
opportunity cost of using a resource is the value it could have provided in its best alternative
use.
I and III only
I, II and III only
I, II and IV only
All of above
Sunk costs are incremental with respect to the current decision regarding the project
and should be included in its analysis.
Which of the following statements is FALSE?
Because value is lost when a resource is used by another project, we should include
the opportunity cost as an incremental cost of the project.
Sunk costs are incremental with respect to the current decision regarding the project
and should be included in its analysis.
Overhead expenses are associated with activities that are not directly attributable to a single
business activity but instead affect many different areas of the corporation.
,When computing the incremental earnings of an investment decision, we should include all
changes between the firm's earnings with the project versus without the project.
To the extent that overhead costs are fixed and will be incurred in any case, they are
incremental to the project and should be included in the capital budgeting analysis.
Which of the following statements is FALSE?
The ultimate goal in capital budgeting is to determine the effect of the decision to take
a particular project on the firm's cash flows.
To the extent that overhead costs are fixed and will be incurred in any case, they are
incremental to the project and should be included in the capital budgeting analysis.
Unlevered Net Income = (Revenue - Costs - Depreciation) × (1 - τc).
Earnings are not cash flows.
a sunk cost.
Money that has been or will be paid regardless of the decision whether or not to proceed with
the project is:
cannibalization.
considered as part of the initial investment in the project.
an opportunity cost.
a sunk cost.
$24.0 million
= $80 × .30 = $24 million
Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy
advertising expenses associated with the new SUV launch would generate operating losses of
$35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80
million from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount
that Ford Motor Company will owe in taxes next year without the launch of the new SUV is
closest to:
, $24.0 million
$56.0 million
$31.5 million
$13.5 million
$13.5 million
= (80 - 35) × .30 = 13.5 million
(80 - 35) × .30 = 13.5 million
Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy
advertising expenses associated with the new SUV launch would generate operating losses of
$35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million
from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount that
Ford Motor Company will owe in taxes next year with the launch of the new SUV is closest to:
$13.5 million
$31.5 million
$56.0 million
$24.0 million
$8000
Incremental Earnings Forecast
Year 1 2 3
Units 2000 2200 2420
Sales (units × $18) 36,000 39,600 43,560
Cost of Good Sold (units × $9) 18,000 19,800 21,780
Gross Profit 18,000 19,800 21,780
Depreciation ($30,000/3) 10,000 10,000 10,000
EBIT 8000 9800 11,780
Verified 100% Correct
I, II and IV only
Which of the following statements is/are true?I) We begin the capital budgeting process by
determining the incremental earnings of a project.II) The marginal corporate tax rate is the
tax rate the firm will pay on an incremental dollar of pre-tax income.III) Investments in plant,
property, and equipment are directly listed as expense when calculating earnings.IV) The
opportunity cost of using a resource is the value it could have provided in its best alternative
use.
I and III only
I, II and III only
I, II and IV only
All of above
Sunk costs are incremental with respect to the current decision regarding the project
and should be included in its analysis.
Which of the following statements is FALSE?
Because value is lost when a resource is used by another project, we should include
the opportunity cost as an incremental cost of the project.
Sunk costs are incremental with respect to the current decision regarding the project
and should be included in its analysis.
Overhead expenses are associated with activities that are not directly attributable to a single
business activity but instead affect many different areas of the corporation.
,When computing the incremental earnings of an investment decision, we should include all
changes between the firm's earnings with the project versus without the project.
To the extent that overhead costs are fixed and will be incurred in any case, they are
incremental to the project and should be included in the capital budgeting analysis.
Which of the following statements is FALSE?
The ultimate goal in capital budgeting is to determine the effect of the decision to take
a particular project on the firm's cash flows.
To the extent that overhead costs are fixed and will be incurred in any case, they are
incremental to the project and should be included in the capital budgeting analysis.
Unlevered Net Income = (Revenue - Costs - Depreciation) × (1 - τc).
Earnings are not cash flows.
a sunk cost.
Money that has been or will be paid regardless of the decision whether or not to proceed with
the project is:
cannibalization.
considered as part of the initial investment in the project.
an opportunity cost.
a sunk cost.
$24.0 million
= $80 × .30 = $24 million
Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy
advertising expenses associated with the new SUV launch would generate operating losses of
$35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80
million from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount
that Ford Motor Company will owe in taxes next year without the launch of the new SUV is
closest to:
, $24.0 million
$56.0 million
$31.5 million
$13.5 million
$13.5 million
= (80 - 35) × .30 = 13.5 million
(80 - 35) × .30 = 13.5 million
Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy
advertising expenses associated with the new SUV launch would generate operating losses of
$35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million
from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount that
Ford Motor Company will owe in taxes next year with the launch of the new SUV is closest to:
$13.5 million
$31.5 million
$56.0 million
$24.0 million
$8000
Incremental Earnings Forecast
Year 1 2 3
Units 2000 2200 2420
Sales (units × $18) 36,000 39,600 43,560
Cost of Good Sold (units × $9) 18,000 19,800 21,780
Gross Profit 18,000 19,800 21,780
Depreciation ($30,000/3) 10,000 10,000 10,000
EBIT 8000 9800 11,780
