Chapter 12: Cash Flows Estimation and Risk Analysis
CHAPTER 12: CASH FLOW ESTIMATION AND RISK ANALYSIS
1. Because of improvements in forecasting techniques, estimating the cash flows associated with a project has become the easiest step in the capital budgeting process.
a. True
b. False
ANSWER: False
2. Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects’ cash flows.
a. True
b. False
ANSWER: True
3. Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects’ initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects.
a. True
b. False
ANSWER: False
4. Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.
a. True
b. False
ANSWER: False
5. If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.
a. True
b. False
ANSWER: True
6. If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.
a. True
b. False
ANSWER: False
7. Any cash flows that can be classified as incremental to a particular project—i.e., results directly from the decision to undertake the project—should be reflected in the capital budgeting analysis.
a. True
b. False
ANSWER: True
8. We can identify the cash costs and cash inflows to a company that will result from a project. These could be called “direct inflows and outflows,” and the net difference is the direct net cash flow. If there are other costs and benefits that do not flow from or to the firm, but to other parties, these
1. Because of improvements in forecasting techniques, estimating the cash flows associated with a project has become the easiest step in the capital budgeting process.
a. True
b. False
ANSWER: False
2. Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects’ cash flows.
a. True
b. False
ANSWER: True
3. Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects’ initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects.
a. True
b. False
ANSWER: False
4. Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.
a. True
b. False
ANSWER: False
5. If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.
a. True
b. False
ANSWER: True
6. If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.
a. True
b. False
ANSWER: False
7. Any cash flows that can be classified as incremental to a particular project—i.e., results directly from the decision to undertake the project—should be reflected in the capital budgeting analysis.
a. True
b. False
ANSWER: True
8. We can identify the cash costs and cash inflows to a company that will result from a project. These could be called “direct inflows and outflows,” and the net difference is the direct net cash flow. If there are other costs and benefits that do not flow from or to the firm, but to other parties, these