9. The _____________ option says that a firm can end a project at any time if a project is performing poorly while the __________ option involves having excess capacity in case a project performs better than expected.

a) Abandonment; Expansion

Timing; Expansion

Shutdown; Flexibility

Flexibility; Abandonment

10. Which statement is FALSE?_

Replacement Chain is a method used to compare two repeatable projects with different lives.

b) Crossover Rate is the rate at which two projects have the same NPV.

The IRR is used as the required return for projects of average risk

Scenario Analysis measures the impact on project's NPV when a single assumption is changed

11. Which of the following statements is FALSE?

a. Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.

b. One advantage of sensitivity analysis is that it highlights specific areas of concern about the project.

c. Corporations should consider real options when evaluating projects.

d. Simulation analysis is a computerized version of scenario analysis where input variables are selected based on their probability distributions.

12. Which of the following is an example of a flexibility option?

a. A company has the option to invest in a project today or to wait a year.

b. A company has the option to back out of a project that turns out to be unproductive.

c. A company pays a higher cost today in order to be able to reconfigure the projects inputs or outputs at a later date.

d. A company invests in a project today that may lead to enhanced technological improvements that allow it to expand into different markets at a later date.

13. Mulroney Corp. is considering two mutually exclusive projects. Project X costs $10,000 and has an expected life of 3 years with after-tax cash inflows of $4,200 per year. Project Y costs $15,000 and has an expected life of 5 years with after-tax cash inflows of $4,000 per year. Each project has a WACC of 8%. Use the equivalent annual annuity approach to determine which project should be chosen.

a) Project X b) Project Y

14. Which statement is FALSE?

The NPV method assumes that Cash flows are reinvested at the firms WACC

• The use of Accelerated Depreciation methods (instead of Straight-Line) results in higher operating cash flows in a projects early years.
• For independent projects with normal cash flows, the NPV, Payback and IRR methods will always lead to the same ranking of projects from best to worst.
• For normal projects, higher costs of capital lead to lower NPVs.

15. Which of the following is true for normal projects if the cost of capital is positive?

If a project's IRR is positive, then its NPV will always be positive

b) If a project's NPV is negative, then its Payback Period will not exist

If a project's NPV is positive, then its IRR will always be positive

If a project's IRR is negative, then its Profitability Index will always be negative

16. Which of the following is NOT considered a relevant concern in determining incremental cash flows for a new product?

a. The use of high quality factory floor space that is currently unused but is available for production of other products.

b. Revenues from an existing product that would be lost as a result of customers switching to the new product.

c. Shipping and installation costs associated with preparing the machine to be used to produce the new product.

d. The cost of a marketing study completed last year related to the new product.