Capital Budgeting Solution Essay

3317 Words Aug 5th, 2012 14 Pages
Corporate Finance: The Core (Berk/DeMarzo) Chapter 7 - Fundamentals of Capital Budgeting

1) Which of the following statements is false? A) Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project. B) Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis. C) Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation. D) When computing the incremental earnings of an investment decision, we should include all changes between the firm’s earnings with the
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D) a sunk cost. Answer: A Explanation: A) B) C) D)
Diff: 1 Topic: 7.1 Forecasting Earnings Skill: Definition

6) Suppose that of the 60% of FFLʹs current overnight photo customers, half would start taking their film to a competitor that offers one hour photo processing if FFL fails to offer the one hour service. The level of incremental sales in this case is closest to: A) $60,000 B) $150,000 C) $90,000 D) $120,000 Answer: D Explanation: A) B) C) D) = $150,000 - (cannibalized sales) = 150000 - (.60 × .50) × 100,000 = $120,000 Note that the rate of cannibalization is only 30% (.60 × .50) since the other 30% would have taken their film elsewhere.
Diff: 2 Topic: 7.1 Forecasting Earnings Skill: Analytical

Use the information for the question(s) below. Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI plans on lowering their price next year to $99 per unit. The cost of goods sold for each Glucoscan unit is $50, and GSI expects to sell 100,000 units over the next year. 7) Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 30% to 130,000 units. The incremental impact of this price drop on the firms EBIT is closest to: A) a decline of 1.5 million B) an increase of 1.5 million C) a decline of 2.4 million D) an increase of 2.4 million Answer:

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