1. Sensitivity analysis is used in capital budgeting to:

Multiple Choice Options:

(A) Estimate a project's internal rate of return (IRR).

(B) Determine the optimal contribution margin given a set of resource constraints.

(C.) Determine the amount that a variable in a decision model (e.g., annual after-tax cash inflows) can (D) change without changing the indicated decision (e.g., acceptance of a project).

(E.) Simulate probabilistic customer reactions to a new product.

(F) Capture income tax consequences.

2. In capital budgeting, the accounting rate of return (ARR) decision model:

Multiple Choice Options:

(A) Considers the time value of money.

(B) Ignores cash outflows after the initial investment.

(C.) Incorporates the timing of cash flows.

(D) Ignores accounting income generated after the break-even point.

(E.) Does not provide an unambiguous decision criterion (rule) regarding the acceptance of capital investment projects.

3. Which of the following is an example of a sunk cost in a capital budgeting decision regarding the replacement of an existing piece of equipment for a profitable business that pays taxes?

Multiple Choice Options:

(A) The disposal (salvage) value of the equipment to be replaced.

(B) The original purchase price of the equipment to be replaced.

(C.) The additional net working capital requirement.

(D) The operating cost of the new equipment.

(E.) Income taxes on the disposal of the equipment to be replaced.

4. Conceptually, a firm's capital structure is its:

Multiple Choice Options:

(A) Mix of debt and equity capital, expressed in book-value terms.

(B) Mix of debt and equity capital, expressed in market-value terms.

(C.) Equity capital only, expressed in book-value terms.

(D) Equity capital only, expressed in market-value terms.

5. The profitability index (PI) for a proposed project is calculated as:

Multiple Choice Options:

(A) Net present value (NPV) divided by average investment.

(B) Net present value (NPV) divided by initial investment.

(C.) Average investment divided by net present value (NPV).

(D) Initial investment divided by net present value (NPV).

(E.) Average after-tax income divided by average investment.

6. The accounting rate of return (ARR):

Multiple Choice Options:

(A) Is synonymous with the internal rate of return (IRR).

(B) Focuses on accrual-basis income numbers rather than after-tax cash flows.

(C.) Generally provides a good estimate of a project's IRR.

(D) Explicitly recognizes the time value of money.

(E.) Can be used to choose between mutually exclusive projects.

7. When the net present value (NPV) of a project is calculated based on the assumption that the after-tax cash inflows occur at the end of the year when they actually occur uniformly throughout each year, the NPV will:

Multiple Choice Options:

(A) Not be in error.

(B) Be slightly overstated.

(C.) Be unusable for actual decision-making.

(D) Be slightly understated but probably usable.

(E.) Produce an error the direction of which is undeterminable.