1. Sunk costs comprise of any cost that __________.
A) will change the company's cash flows when a project is undertaken
B) will be incurred as soon as a project is accepted
C) has been incurred previously and, therefore, cannot be changed
D) is paid to a third party and cannot be refunded for any reason whatsoever
E) will occur if a project is accepted and, once incurred, cannot be recovered
2. Which of the following are examples of side effects (erosion/cannibalization)?
I. The loss of sales due to increased competition in the product market
II. The loss of sales because your chief competitor just opened a store across the street from your store
III. The loss of sales due to a new product you just introduced
IV. The loss of sales due to a new product your main competitor recently introduced
A) III only
B) III and IV only
C) I, III, and IV only
D) II and IV only
E) I, II, III, and IV
3.A firm is using the same company-wide cost of capital for evaluating all of its capital investment projects. Which of the following statements describes the likely result of such a policy?
I. Rejection of good, low-risk projects
II. Acceptance of poor, high-risk projects
III. Correct acceptance of projects with the same risk as the company's risk
IV. Acceptance of poor, low-risk projects
A) I only
B) II only
C) III only
D) I, II, and III only
E) I and IV only
4.To carry out sensitivity analysis, managers need to __________.
A) hold all variables at their base levels and change the cost of capital assigned to a project
B) change the values of two variables to determine their interdependence
C) change the value of one variable and compute the resulting change in the project's current value
D) assign either the best or the worst possible value to each variable and compare the resulting project value to that obtained by the base case
E) determine how each variable affects the level of output realized after the project has been implemented
5.One should use caution when using decision tree analysis to evaluate projects, because __________.
A) decisions at the early stage are likely to be riskier, and hence should use a higher discount rate
B) if a negative NPV is actually occurring, management should opt out of the project to minimize the loss in firm value
C) decision trees are only used for financial planning
D) both A and C
E) both A and B
6.Which of the following statements is true?
A) The Black-Scholes-Merton model is the simplest to use and is best used for complex situations.
B) The binomial model does not handle options with dividend payments prior to expiration date.
C) The Black-Scholes-Merton model adequately handles the valuation of an American put.
D) The binomial model is better for complex situations and is the simplest tool to use.
E) The Black-Scholes-Merton model is simpler to use, but for complex situations the binomial model is the necessary tool.
7.When a project has optionality, __________.
A) it will be less valuable when the available life of the project is shorter
B) it will be less valuable when the available life of the project is longer
C) it will be more valuable when the available life of the project is shorter
D) the available life of the project does not change optionality or its value
E) None of the above
8.Which of the following situations might lead a manager to delay undertaking a positive NPV project? Assume that the project's NPV, if undertaken immediately, is held constant.
A) The risk-free interest rate falls.
B) Uncertainty about future project value increases.
C) The first cash inflow generated by the project is lower than previously expected.
D) The investment required for the project increases.
E) All of the above
9.A rational, value-maximizing manager may be reluctant to commit to a positive NPV project when __________.
A) the value of the option to abandon is high
B) the option's exercise price is high
C) the opportunity cost of capital is high
D) the value of the option to wait is high
E) all of the above
10.To determine a real option's current value, one would need to __________.
A) compute the expected value of the option's future payoffs at the company's cost of capital
B) compute the expected value of the option's future payoffs using manager's probabilities
C) compute the discounted expected value of the option's future payoffs using the risk-neutral probabilities and the risk free rate
D) sum the option's future payoffs discounted at the risk free rate
E) none of the above