FIN 3403 EXAM 3 REVIEW QUESTIONS WITH
VERIFIED SOLUTIONS
The stand-alone principle advocates that project analysis should be based solely on which
one of the following costs?
incremental
The fact that a proposed project is analyzed based on the project's incremental cash flows
is the assumption behind which one of the following principles?
Stand-Alone Principle
The difference between a firm's future cash flows if it accepts a project and the firm's
future cash flows if it does not accept the project is referred to as the project's:
incremental cash flows
Which one of the following costs was incurred in the past and cannot be recouped?
sunk
The option that is foregone so that an asset can be utilized by a specific project is referred
to as which one of the following?
opportunity cost
Which one of the following best describes pro forma financial statements?
A. financial statements expressed in a foreign currency
B. financial statements where the assets are expressed as a percentage of total assets and costs
are expressed as a percentage of sales
C. financial statements showing projected values for future time periods
D. financial statements expressed in real dollars, given a stated base year
E. financial statements where all accounts are expressed as a percentage of last year's values
C is the correct answer.
Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The
firm is currently considering making handmade wreaths as well. Which one of the
following is the best example of an incremental operating cash flow related to the wreath
project?
,A. storing supplies in the same space currently used for materials storage
B. utilizing the basket manager to oversee wreath production
C. hiring additional employees to handle the increased workload should the firm accept the
wreath project
D. researching the market to determine if wreath sales might be profitable before deciding to
proceed
E. planning on lower interest expense by assuming the proceeds of the wreath sales will be used
to reduce the firm's currently outstanding debt
C is the correct answer.
Danielle's is a furniture store that is considering adding appliances to its offerings. Which
of the following should be considered incremental cash flows of this project?
I. utilizing the credit offered by a supplier to purchase the appliance inventory
II. benefiting from increased furniture sales to appliance customers
III. borrowing money from a bank to fund the appliance project
IV. purchasing parts for inventory to handle any appliance repairs that might be necessary
A. I and II only
B. III and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
C is the correct answer.
Which one of the following is an example of a sunk cost?
A. $1,500 of lost sales because an item was out of stock
B. $1,200 paid to repair a machine last year
C. $20,000 project that must be forfeited if another project is accepted
D. $4,500 reduction in current shoe sales if a store commences selling sandals
, E. $1,800 increase in comic book sales if a store commences selling puzzles
B is the correct answer.
G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company
is trying to decide if the machine could be better utilized if they assigned it a proposed
project. When analyzing the proposed project, the $1,200 should be treated as which type
of cost?
sunk
Which of the following should be included in the analysis of a new product?
I. money already spent for research and development of the new product
II. reduction in sales for a current product once the new product is introduced
III. increase in accounts receivable needed to finance sales of the new product
IV. market value of a machine owned by the firm which will be used to produce the new
product
II, III and IV only
Changes in the net working capital requirements:
can affect the cash flows of a project every year of the projects life
Net working capital:
A. can be ignored in project analysis because any expenditure is normally recouped at the end of
the project.
B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning
of a project.
C. is rarely affected when a new product is introduced.
D. can create either a cash inflow or a cash outflow at time zero of a project.
E. is the only expenditure where at least a partial recovery can be made at the end of a project.
D is the correct answer.
Pro forma statements for a proposed project should:
I. be compiled on a stand-alone basis.
II. include all the incremental cash flows related to the project.
III. generally exclude interest expense.
IV. include all project-related fixed asset acquisitions and disposals.
VERIFIED SOLUTIONS
The stand-alone principle advocates that project analysis should be based solely on which
one of the following costs?
incremental
The fact that a proposed project is analyzed based on the project's incremental cash flows
is the assumption behind which one of the following principles?
Stand-Alone Principle
The difference between a firm's future cash flows if it accepts a project and the firm's
future cash flows if it does not accept the project is referred to as the project's:
incremental cash flows
Which one of the following costs was incurred in the past and cannot be recouped?
sunk
The option that is foregone so that an asset can be utilized by a specific project is referred
to as which one of the following?
opportunity cost
Which one of the following best describes pro forma financial statements?
A. financial statements expressed in a foreign currency
B. financial statements where the assets are expressed as a percentage of total assets and costs
are expressed as a percentage of sales
C. financial statements showing projected values for future time periods
D. financial statements expressed in real dollars, given a stated base year
E. financial statements where all accounts are expressed as a percentage of last year's values
C is the correct answer.
Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The
firm is currently considering making handmade wreaths as well. Which one of the
following is the best example of an incremental operating cash flow related to the wreath
project?
,A. storing supplies in the same space currently used for materials storage
B. utilizing the basket manager to oversee wreath production
C. hiring additional employees to handle the increased workload should the firm accept the
wreath project
D. researching the market to determine if wreath sales might be profitable before deciding to
proceed
E. planning on lower interest expense by assuming the proceeds of the wreath sales will be used
to reduce the firm's currently outstanding debt
C is the correct answer.
Danielle's is a furniture store that is considering adding appliances to its offerings. Which
of the following should be considered incremental cash flows of this project?
I. utilizing the credit offered by a supplier to purchase the appliance inventory
II. benefiting from increased furniture sales to appliance customers
III. borrowing money from a bank to fund the appliance project
IV. purchasing parts for inventory to handle any appliance repairs that might be necessary
A. I and II only
B. III and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
C is the correct answer.
Which one of the following is an example of a sunk cost?
A. $1,500 of lost sales because an item was out of stock
B. $1,200 paid to repair a machine last year
C. $20,000 project that must be forfeited if another project is accepted
D. $4,500 reduction in current shoe sales if a store commences selling sandals
, E. $1,800 increase in comic book sales if a store commences selling puzzles
B is the correct answer.
G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company
is trying to decide if the machine could be better utilized if they assigned it a proposed
project. When analyzing the proposed project, the $1,200 should be treated as which type
of cost?
sunk
Which of the following should be included in the analysis of a new product?
I. money already spent for research and development of the new product
II. reduction in sales for a current product once the new product is introduced
III. increase in accounts receivable needed to finance sales of the new product
IV. market value of a machine owned by the firm which will be used to produce the new
product
II, III and IV only
Changes in the net working capital requirements:
can affect the cash flows of a project every year of the projects life
Net working capital:
A. can be ignored in project analysis because any expenditure is normally recouped at the end of
the project.
B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning
of a project.
C. is rarely affected when a new product is introduced.
D. can create either a cash inflow or a cash outflow at time zero of a project.
E. is the only expenditure where at least a partial recovery can be made at the end of a project.
D is the correct answer.
Pro forma statements for a proposed project should:
I. be compiled on a stand-alone basis.
II. include all the incremental cash flows related to the project.
III. generally exclude interest expense.
IV. include all project-related fixed asset acquisitions and disposals.
