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BADM 710 - Chapter 6 Questions with Explanations of Answers | latest upate 2024
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BADM 710 - Chapter 6 Questions with Explanations of Answers | latest upate 2024
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BADM 710 - Chapter 6Sunk Cost - ANS-- A cost that has already occurred and cannot be reversed. Such costs should
be ignored when deciding whether to accept or reject a project
Opprotunity Cost - ANS-- Most valuable alternative that is given up. The discount rate used in
NPV computation is an opportunity interest rate
- EX: Owning a piece of land and building a new plant on it and foregoing the lease that
someone was originally paying on it
Erosion (Bad) - ANS-- Cash-flow amount transferred to a new project from customers and sales
of other products of the firm.
Synergy (Good) - ANS-- 1) When the value of a combined firm after a merger is greater than the
sum of the values of the firms premerger
- 2) The positive incremental net gain associated with the combination of two firms through a
merger or acquisition
Net Working Capital - ANS-- Current assets minus current liabilities
Depreciation tax shield - ANS-- Portion of an investment that can be deducted from taxable
income
Real Cash Flow - ANS-- A cash flow that is expressed in terms of purchasing power, not actual
dollars
- Use a REAL R
- Should give the same NPV as nominal
Nominal Cash Flow - ANS-- A cash flow expressed in actual currency
- This does not consider inflation
- Must use a NOMINAL R
- Should give the same NPV as Real
Relevant Cash Flows - ANS-Incremental cash flows - YES
Sunk Costs - NO
Opportunity Costs - YES
Side Effects (synergies or Erosion) - YES
Taxes - YES
Interest Expense (Does not affect cash flows but affects the discount rate) - NO
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