Capital Budgeting Solution
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 project versus without the project. Answer: B Explanation: A) B) C) D)
Diff: 2 Topic: 7.1 Forecasting Earnings Skill: Conceptual
2) Which of the following costs would you consider when making a capital budgeting decision? A) Sunk cost B) Opportunity cost C) Interest expense D) Fixed overhead cost Answer: B Explanation: A) B) C) D)
Diff: 1 Topic: 7.1 Forecasting Earnings Skill: Conceptual
3) A decrease in the sales of a current project because of the launching of a new project is A) cannibalization. B) a sunk cost. C) an overhead expense. D) irrelevant to the investment decision. Answer: A Explanation: A) B) C) D)
Diff: 1 Topic: 7.1 Forecasting Earnings Skill: Definition
4) Money that has been or will be paid regardless of the decision whether or not to proceed with the project is A) cannibalization. B) considered as part of the initial investment in the project. C) an opportunity cost. D) a sunk cost. Answer: D Explanation: A) B) C) D)
Diff: 1 Topic: 7.1 Forecasting Earnings Skill: Definition
5) The value of currently unused warehouse space that will be used as part of a new 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 project versus without the project. Answer: B Explanation: A) B) C) D)
Diff: 2 Topic: 7.1 Forecasting Earnings Skill: Conceptual
2) Which of the following costs would you consider when making a capital budgeting decision? A) Sunk cost B) Opportunity cost C) Interest expense D) Fixed overhead cost Answer: B Explanation: A) B) C) D)
Diff: 1 Topic: 7.1 Forecasting Earnings Skill: Conceptual
3) A decrease in the sales of a current project because of the launching of a new project is A) cannibalization. B) a sunk cost. C) an overhead expense. D) irrelevant to the investment decision. Answer: A Explanation: A) B) C) D)
Diff: 1 Topic: 7.1 Forecasting Earnings Skill: Definition
4) Money that has been or will be paid regardless of the decision whether or not to proceed with the project is A) cannibalization. B) considered as part of the initial investment in the project. C) an opportunity cost. D) a sunk cost. Answer: D Explanation: A) B) C) D)
Diff: 1 Topic: 7.1 Forecasting Earnings Skill: Definition
5) The value of currently unused warehouse space that will be used as part of a new capital budgeting