When is a profitability index used

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Reference no: EM131004110

Question 1

Which of the following would not be counted as part of incremental cash flow?

a) Opportunity cost.

b) Sunk cost.

c) External cost such as brand cannibalism.

d) External benefit such as acquisition of new technology which can be applied to other projects.

Question 2

Which of the following would be counted as part of incremental cash flow?

a) Sunk cost.

b) Depreciation.

c) An allocation towards general company overhead cost.

d) Change in working capital.

Question 3

Which of the following defines free cash flow?

a) After-tax operating income + depreciation + interest - capital expenditures - change in net working capital.

b) Gross profit + depreciation + interest - capital expenditures - change in net working capital.

c) Net profit + depreciation + interest - capital expenditures - change in net working capital.

d) After-tax operating income + tax shield + depreciation + interest - capital expenditures - change in net working capital.

Question 4

Which of the following should be included at the start of the project?

a) Research costs.

b) Historical costs.

c) Investment in fixed and working capital.

d) Continuation value.

Question 5

Which of the following would not be counted after the end of a project?

a) Scrap value.

b) Continuation value.

c) Release of working capital.

d) Change in working capital.

Question 6

How can we compare projects in the case where they have different life-spans?

a) Use the annuity equivalent approach.

b) Use the perpetuity equivalent approach.

c) Use both the perpetuity and annuity equivalent approach.

d) Select the project with the shorter payback period.

Question 7

What is the tax shield?

a) The tax shield is a benefit which accrues to companies which are able to channel their funds through tax havens.

b) The tax shield is the benefit which accrues to firms which are located in special enterprise areas.

c) The tax shield is the phenomenon whereby allowable expenses such as interest and depreciation reduce taxable profit.

d) The tax shield allows initial capital expenditure to be offset against tax, when calculating taxable profit.

Question 8

When is a profitability index used?

a) When capital is rationed.

b) When IRR cannot be used.

c) When IRR and NPV conflict.

d) When payback is deemed to have insufficiently taken into account the time value of money.

Question 9

Which of the following is not a real option?

a) Timing.

b) Growth.

c) Financial.

d) Exit.

Question 10

Which type of real option would best describe the Keelman example?

a) Staging.

b) Timing.

c) Learning.

d) All three.

Reference no: EM131004110

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