Multiple choice

1.  Investment in net working capital is not depreciated because:  

a. It is not a cash flow 

b. It is recovered during or at the end of the project and is not a depreciating asset 

c. It is a sunk cost 

d. All of the above 

2.  Net Working Capital should be considered in project cash flows because:  

a. Firms must invest cash in short-term assets to produce finished goods 

b. They are sunk costs 

c. Firms need positive NPV projects for investment 

d. None of the above 

3.  Investment in inventories includes investment in: I) Raw material II) Work-in-progress III) Finished goods  

a. I only 

b. I and II only 

c. I, II, and III 

d. III only 

4.  For example, in case of an electric car project, the following cash flows should be treated as incremental flows when deciding whether to go ahead with the project except:  

a. The consequent reduction in sales of the company's existing gasoline models (i.e.: incidental effects) 

b. Interest payment on debt 

c. The value of tools that can be transferred from the company's existing plants 

d. The expenditure on new plants and equipment 

5.  The principal short-term assets are: I) Cash, II) Accounts receivable, III) Inventories and IV) Accounts Payable 

a. I only 

b. I and IV only 

c. I, II, and III 

d. IV only 

6. The value of a previously purchased machine to be used by a proposed project is an example of:  

a. Sunk cost 

b. Opportunity cost 

c. Fixed cost 

d. None of the above 

7. Money that a firm has already spent or committed to spend regardless of whether a project is taken is called:  

a. Fixed cost 

b. Opportunity cost 

c. Sunk cost 

d. None of the above 

8. The cost that is incurred as a result of past, irrevocable decisions and is irrelevant to future decisions is called:  

a. Opportunity cost 

b. Sunk cost 

c. Incremental cost 

d. None of the above 

9. For example, in the case of an electric car project, which of the following cash flows should be treated as incremental flows when deciding whether to go ahead with the project?  

a. The cost of research and development undertaken for developing the electric car in the past three years 

b. The annual depreciation charge 

c. Tax savings resulting from the depreciation charges 

d. Dividend payments 

10. In the case of freely traded resources, opportunity cost is the:  

a. Book value 

b. Market value 

c. Historical value 

d. None of the above