1.Mason Webb makes the following statements to his boss, Laine DeWalt about the principles of capital budgeting.

Statement 1: Opportunity costs are not true cash outflows and should not be considered in a capital budgeting analysis.

Statement 2: Cash flows should be analyzed on an after-tax basis.

Should DeWalt agree or disagree with Webb’s statements?

A)                                        Agree    Agree

B)                                        Disagree       Disagree

C)                                        Agree    Disagree

D)                                        Disagree       Agree

2.Financing costs for a capital project are:

A)   subtracted from estimates of a project’s future cash flows.

B)   subtracted from the net present value of a project.

C)   a sunk cost and should not be considered in the project analysis.

D)   captured in the project’s required rate of return.

3.Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting:

Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project.

Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project.

Which of the following regarding Lutz’s statements is most accurate?

A)                                        Correct  Correct

B)                                        Incorrect       Correct

C)                                        Incorrect       Incorrect

D)                                        Correct  Incorrect

答案和详解如下：

1.Mason Webb makes the following statements to his boss, Laine DeWalt about the principles of capital budgeting.

Statement 1: Opportunity costs are not true cash outflows and should not be considered in a capital budgeting analysis.

Statement 2: Cash flows should be analyzed on an after-tax basis.

Should DeWalt agree or disagree with Webb’s statements?

Statement 1

Statement 2

A)                                        Agree    Agree

B)                                        Disagree       Disagree

C)                                        Agree    Disagree

D)                                        Disagree       Agree

The correct answer was D)

DeWalt should disagree with Webb’s first statement. Cash flows are based on opportunity costs. Any cash flows that the firm gives up because a project is undertaken should be charged to the project. DeWalt should agree with Webb’s second statement. The impact of taxes must be considered when analyzing capital budgeting projects.

2.Financing costs for a capital project are:

A)   subtracted from estimates of a project’s future cash flows.

B)   subtracted from the net present value of a project.

C)   a sunk cost and should not be considered in the project analysis.

D)   captured in the project’s required rate of return.

The correct answer was D)

Financing costs are reflected in a project’s required rate of return. Project specific financing costs should not be included as project cash flows. The firm's overal weighted average cost of capital, adjusted for project risk, should be used to discount expected project cash flows.

3.Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting:

Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project.

Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project.

Which of the following regarding Lutz’s statements is most accurate?

Statement 1

Statement 2

A)                                        Correct  Correct

B)                                        Incorrect       Correct

C)                                        Incorrect       Incorrect

D)                                        Correct  Incorrect

The correct answer was D)

Lutz’s first statement is correct. The timing of cash flows is important for making correct capital budgeting decisions. Capital budgeting decisions account for the time value of money. Lutz’s second statement is incorrect. Capital budgeting decisions should be based on incremental after-tax cash flows, not net (accounting) income.