FIN 3113 Chapter 10
Questions and Verified Answers
Sunk Cost Correct Answer: Cost we have already paid or have already incurred the
liability to pay. Cannot be changed by the decision today to accept or reject a
project.
Opportunity Cost Correct Answer: Requires us to give up a benefit
Erosion Correct Answer: Negative impact on the cash flows of an existing product
from the introduction of a new product.
Project Cash Flow Correct Answer: Project Operating cash flow - project change in
net working capital - project capital spending
Operating Cash Flow Correct Answer: EBIT + Depreciation - Taxes
First step in estimating cash flow is to determine the _____ cash flows Correct
Answer: Relevant
When developing cash flows for capital budgeting, it is _____ to overlook
important items. Correct Answer: Easy
Incremental cash flows come about as an ____ consequence of taking a project
under consideration. Correct Answer: Direct
____ principle: once the incremental cash flows from a project have been identified,
the project can be viewed as a minifirm Correct Answer: Stand-alone
T/F: A sunk cost is an example of a relevant incremental cash flow. Correct Answer:
False
Example of an opportunity cost Correct Answer: Rental income likely to be lost by
using a vacant building for an upcoming project.
Questions and Verified Answers
Sunk Cost Correct Answer: Cost we have already paid or have already incurred the
liability to pay. Cannot be changed by the decision today to accept or reject a
project.
Opportunity Cost Correct Answer: Requires us to give up a benefit
Erosion Correct Answer: Negative impact on the cash flows of an existing product
from the introduction of a new product.
Project Cash Flow Correct Answer: Project Operating cash flow - project change in
net working capital - project capital spending
Operating Cash Flow Correct Answer: EBIT + Depreciation - Taxes
First step in estimating cash flow is to determine the _____ cash flows Correct
Answer: Relevant
When developing cash flows for capital budgeting, it is _____ to overlook
important items. Correct Answer: Easy
Incremental cash flows come about as an ____ consequence of taking a project
under consideration. Correct Answer: Direct
____ principle: once the incremental cash flows from a project have been identified,
the project can be viewed as a minifirm Correct Answer: Stand-alone
T/F: A sunk cost is an example of a relevant incremental cash flow. Correct Answer:
False
Example of an opportunity cost Correct Answer: Rental income likely to be lost by
using a vacant building for an upcoming project.
