1. A firm evaluates a future project by undertaking a feasibility study. If the project is accepted it will reduce demand for existing products it sells. The firm will have to borrow money to fund the project. Which of the following cash flows is relevant to evaluating the NPV of this project?
a. Financing costs associated with the firm borrowing money.
b. The amount of revenue lost as a result of cannibilised sales from reduced demand.
c. The cost of the feasibility study.
d. None of the above are relevant to calculating the NPV.
2. Which of the following statements is false?
a. To compute the NPV for a project, you need to estimate the incremental cash flows and choose a discount rate.
b.Estimates of the cash flows and cost of capital are often subject to significant uncertainty.
c.When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.
d.Sensitivity analysis allows us to explore the effects of errors in our estimated inputs in our NPV analysis for the project.