Which of the following statements is CORRECT?

In a capital budgeting analysis where part of the funds used to finance the project would be raised as debt, failure to include interest expense as a cost when determining the project's cash flows will lead to a downward bias in the NPV.

The existence of any type of "externality" will reduce the calculated NPV versus the NPV that would exist without the externality.

If one of the assets to be used by a potential project is already owned by the firm, and if that asset could be sold or leased to another firm if the new project were not undertaken, then the net after-tax proceeds that could be obtained should be charged as a cost to the project under consideration.

If one of the assets to be used by a potential project is already owned by the firm but is not being used, then any costs associated with that asset is a sunk cost and should be ignored.

In a capital budgeting analysis where part of the funds used to finance the project would be raised as debt, failure to include interest expense as a cost when determining the project's cash flows will lead to an upward bias in the NPV.

Which of the following statements is CORRECT?

Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.

A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank's other offices.

A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.

If sunk costs are considered and reflected in a project's cash flows, then the project's calculated NPV will be higher than it otherwise would be.

An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.

Which of the following statements is CORRECT?

	An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to increase.
	The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.
	Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
	Identifying an externality can never lead to an increase in the calculated NPV.
	An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality.

Which of the following factors should be included in the cash flows used to estimate a project's NPV?

	Interest on funds borrowed to help finance the project.
	The end-of-project recovery of any working capital required to operate the project.
	Cannibalization effects, but only if those effects increase the project's projected cash flows.
	Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.
	All costs associated with the project that have been incurred prior to the time the analysis is being conducted.

Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects?

	Project B, which has below-average risk and an IRR = 8.5%.
	Project C, which has above-average risk and an IRR = 11%.
	Without information about the projects' NPVs we cannot determine which project(s) should be accepted.
	All of these projects should be accepted.
	Project A, which has average risk and an IRR = 9%.

The capital intensity ratio is generally defined as follows:

	The percentage of liabilities that increase spontaneously as a percentage of sales.
	The ratio of sales to current assets.
	The ratio of current assets to sales.
	The amount of assets required per dollar of sales, or A0*/S0.
	Sales divided by total assets, i.e., the total assets turnover ratio.

North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets?

	54.30%
	57.16%
	60.17%
	63.33%
	66.67%

Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million of sales and $100 million of fixed assets. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been operating at full capacity. What target FA/Sales ratio should the company set?

	28.5%
	30.0%
	31.5%
	33.1%
	34.7%

A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?

	The company increases its dividend payout ratio.
	The company begins to pay employees monthly rather than weekly.
	The company's profit margin increases.
	The company decides to stop taking discounts on purchased materials.
	The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.

Which of the following statements is CORRECT?

	If a firm's assets are growing at a positive rate, but its retained earnings are not increasing, then it would be impossible for the firm's AFN to be negative.
	If a firm increases its dividend payout ratio in anticipation of higher earnings, but sales and earnings actually decrease, then the firm's actual AFN must, mathematically, exceed the previously calculated AFN.
	Higher sales usually require higher asset levels, and this leads to what we call AFN. However, the AFN will be zero if the firm chooses to retain all of its profits, i.e., to have a zero dividend payout ratio.
	Dividend policy does not affect the requirement for external funds based on the AFN equation.
	The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds. In other words, it is the growth rate at which the firm's AFN equals zero.

The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity?

	$312.5
	$328.1
	$344.5
	$361.8
	$379.8