Question 1: If, at the end of the project life, a piece of equipment having a book value of $4,000 is expected to bring $3,000 upon resale, and the income tax rate is 40%, how much will be the cash flow?
a. $2,800
b. $3,000
c. $3,400
d. $4,000
Question 2: The use of sensitivity analysis will generally result in:
a. The calculation of a certainty equivalent NPV.
b. The calculation of a best case, a base case and a worst case.
c. The calculation of the coefficient of variation.
d. The calculation of the probability of the maximum profit.
Question 3: The expected value is:
a. The total of all possible outcomes.
b. The arithmetic average of all possible outcomes.
c. The average of all possible outcomes weighted by their respective probabilities.
d. The total of all possible outcomes divided by the number of different possible outcomes.
Question 4: The certainty equivalent approach to accounting for risk in capital budgeting involves:
a. Adjusting the discount rate used to calculate net present values.
b. Adjusting the expected cash flows.
c. Estimating the coefficient of variation.
d. Estimating the standard deviation of the net present values.
Question 5: A drawback in the use of sensitivity analysis in capital budgeting decisions is that it doesn't:
a. Permit evaluating alternative outcomes.
b. Provide estimates of net present values.
c. Assign probability values to outcomes.
d. Consider different possible rates of discount.
Question 6: The use of real options in capital budgeting:
a. May raise the NPV of a capital project.
b. Makes the analysis of the project considerably easier.
c. Allows management to make decisions more quickly.
d. Eliminates the need for calculating the project's risk adjusted discount rate