Chapter 12: Cash Flows Estimation and Risk Analysis Essay

9430 Words Feb 26th, 2015 38 Pages
CHAPTER 12: CASH FLOW ESTIMATION AND RISK ANALYSIS

1. Because of improvements in forecasting techniques, estimating the cash flows associated with a project has become the easiest step in the capital budgeting process.
a. True
b. False

ANSWER: False

2. Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects’ cash flows.
a. True
b. False

ANSWER: True

3. Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects’ initial outlays and subsequent costs can be forecasted with
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a. True
b. False

ANSWER: True

16. Accelerated depreciation has an advantage for profitable firms in that it moves some cash flows forward, thus increasing their present value. On the other hand, using accelerated depreciation generally lowers the reported current year’s profits because of the higher depreciation expenses. However, the reported profits problem can be solved by using different depreciation methods for tax and stockholder reporting purposes.
a. True
b. False

ANSWER: True

17. If a firm’s projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate.
a. True
b. False

ANSWER: True

18. Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions for capital budgeting projects.
a. True
b. False

ANSWER: False

19. It is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop. This is why subjective judgment is often used for such projects along with discounted cash flow analysis.
a. True
b. False

ANSWER: True

20. The two cardinal rules that financial analysts should follow to avoid errors are: (1) in

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