FINA-7001 Business Finance 1 Week 7: Assignment 2 – MC#3

FINA-7001 Business Finance 1 Week 7: Assignment 2 – MC#3 P a g e 1 | 12 1. A Canadian oil company is considering whether or not to develop a site it has been exploring for the past six months. One of the arguments for developing the site is that considerable time and money have already been expended. This cost should not be included in the capital budgeting decision because it is: a) an opportunity cost. b) a sunk cost. c) an operating cost d) a financing cost Answer: b 2. A pharmaceutical company has discovered a new drug that treats gastrointestinal disorders. The R&D costs for the drug were $3 million. In the testing phase of this new drug, the company further discovered that there is a possibility that the drug would be effective against migraine headaches if they invest another 10% in R&D. When evaluating the capital budgeting decision for the migraine remedy, what portion of the R&D costs for the drug should be attributed to the migraine budget? a) 0 percent of the R&D costs. b) $ 300,000 of the R&D costs. c) $ 1.65 million of the R&D costs. d) It cannot be determined until the drug is further tested. There may be more uses for this drug and further testing is required. Answer: b 3. Which of the following would be considered relevant cash flows in a capital budgeting evaluation? I. Increased after-tax income. II. Tax savings due to increased depreciation expense. III. Increased expenditures on inventory for the new project. IV. Benefits that accrue to the local community. a) I, II, and III. b) I, II, and IV. c) I, III, and IV. d) I, II, III, and IV. Answer: a 4. Which of the following is NOT relevant to the cash flow estimates that are associated with a project? a) The associated financing costs. b) The economic life of the project. FINA-7001 Business Finance 1 Week 7: Assignment 2 – MC#3 P a g e 2 | 12 c) The effect of inflation. d) The terminal cash flow. Answer: a 5. Which of the following is correct with respect to working capital and capital budgeting? a) Working capital is ignored in the capital budget. b) Working capital has a different discount rate. c) Working capital is assumed to be recuperated at the end of the life of the project. d) Working capital does not affect cash flow. Answer: c 6. If the asset is depreciated completely before the end of the life of the project, what happens to the salvage value? a) The salvage value is ignored in the capital budget. b) The salvage value is amortized further. c) The after-tax salvage value is discounted at the date of the disposal of the asset. d) The asset’s life is extended. Answer: c 7. Which of the following is NOT a component of the initial after-tax cash flow? a) The change in the net working capital requirements. b) The initial capital cost of the asset. c) The original cost of a capital asset that was incurred se