Contemporary Financial Management, Loose-leaf Version
14th Edition
ISBN: 9781337090636
Author: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
Publisher: South-Western College Pub
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Chapter 12, Problem 7QTD
Summary Introduction
To discuss: The statement “
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Why should the financial manager include opportunity cost but ignore sunk costs when
evaluating a proposed capital investments? Give an example of each.
Which of the following cash flows should not be considered when evaluating a project?
Changes in working capital
Shipping and installation costs
Sunk costs
Opportunity costs
Externalities
Which of the following is NOTa relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
a.
Shipping and installation costs.
b.
Cannibalization effects.
c.
Opportunity costs.
d.
Sunk costs that have been expensed for tax purposes.
e.
Changes in net working capital.
Please explain your answer for better understanding.
Chapter 12 Solutions
Contemporary Financial Management, Loose-leaf Version
Ch. 12 - Prob. 1QTDCh. 12 - Prob. 2QTDCh. 12 - Prob. 3QTDCh. 12 - Prob. 4QTDCh. 12 - Prob. 5QTDCh. 12 - Prob. 6QTDCh. 12 - Prob. 7QTDCh. 12 - Prob. 8QTDCh. 12 - Prob. 9QTDCh. 12 - Prob. 10QTD
Ch. 12 - Prob. 11QTDCh. 12 - Prob. 12QTDCh. 12 - Prob. 13QTDCh. 12 - Prob. 1PCh. 12 - Prob. 2PCh. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Prob. 8PCh. 12 - Prob. 9PCh. 12 - Prob. 10PCh. 12 - Prob. 11PCh. 12 - Prob. 12PCh. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Prob. 18PCh. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - Prob. 23PCh. 12 - Prob. 24PCh. 12 - Prob. 26P
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- The third step for making a capital investment decision is to establish baseline criteria for alternatives. Which of the following would not be an acceptable baseline criterion? A. payback method B. accounting rate of return C. internal rate of return D. inventory turnoverarrow_forwardWhat are the major disadvantages of the use of the internal rate of return method of analyzing capital investment proposals?arrow_forwardA firm’s weighted average cost of capital should not do which one of the following? Group of answer choices measure the cost of short-term sources of funds measure cost on a marginal basis measure the cost of long-term sources of funds measure cost on an after-tax basisarrow_forward
- One of the following methods are not a method to evaluate projects: Return on investment Discounted payback method Return on capital employed Net present value method O Return on equityarrow_forwardWhat are three variables that the firm does not control when it seeks to raise funds; indicate the impact of the costs.arrow_forwardThe third step for making a capital investment decision is to establish baseline criteria for alternatives. Which of the following would not be an acceptable baseline criterion? A) accounting rate of return B) payback method C) inventory turnover D) internal rate of returnarrow_forward
- The methods of evaluating capital investment proposals can be grouped into two general categories referred to as (1) methods that do not use present values and (2) methods that use present values. True Falsearrow_forwardIf net present value for a project is negative, then____. a. IRR is equal to Cost of capital b. IRR is greater than Cost of capital c. Benefit Cost Ratio is greater than 1 d. IRR is less than Cost of capitalarrow_forwardIf the accounting rate of return exceeds the required accounting rate of return, O A. invest in the capital asset. B. only invest if the payback period is also less than the required rate of return. O C. do not invest in the capital asset. OD. only invest if the payback period is also greater than the required rate of return.arrow_forward
- 6. Which of the following is NOT a relevant cash flow and thus should NOT be reflected in the analysis of a capital budgeting project? a. Changes in net operating working capital. b. Shipping and installation costs for machinery acquired. c. Cannibalization effects. d. Opportunity costs. e. Sunk costs that have been expensed for tax purposes.arrow_forwardThe user cost of capital does NOT depend on a. The real interest rate b. The unit price of capital c. The depreciation rate s. The marginal product of capitalarrow_forwardMethods that ignore the time value of money in capital investment appraisal include which of the following? a. Net present valueb. Discounted payback c. Average rate of return d. All of the abovearrow_forward
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