20 Finance True/ False Questions

Answer the following Questions below as True or False1. The capital intensity has a major effect on capital requirements. As the capital intensity increases the AFN (additional funds needed) decreases. 2. Strategic plans usually consist of statements for mission, scope, objectives, and strategics. 3. If a new project leads to a reduction in sales of an existing product it is called cannibalization.4. Sensitivity analysis measures the percentage change in NPV that results from a given percentage change in an input variable when other inputs are held at their expected values.5. Decison tree analysis requires managers to explicitly articulate the types of risk a project faces and to develop responses to potential scenarios.6. Stand-alone risk is easier to measure than either the market risk or the corporate risk.7. When we do a scenario analysis we need to assign probabilities to the best case, the base case, and the worst case.8. If a firm’s fixed assets were being utilized to only 80% of capacity you need to make excess capacity adjustments.9. When a firm replaces existing assets to reduce costs, we call it expansion project10. A firm’s sales increased from $2 million to $4 million for 10 years. To find the annual sales growth, you do the following steps.Step 1: find the total growth for 10 years.(4 million – 2 million)/2 million = 100%Step 2: find the average by dividing 100% by 10 (years)100%/10 = 10%So, you conclude that the annual sales growth is exactly 10%.11. The opportunity cost should be considered in project analysis.12. When a new project is complementary to an old one, it is called the negative within-firm externality.13. Operating plans provide detailed implementation guidance to help firms realize their strategic vision and most firms use a 5-year horizon.14. The real option value can be determined by comparing the project’s expected NPV with and without the option.15. The relevant cash flows to be used in project analysis are incremental cash flows.16. Three key components for the financial plan are sales forecast, forecasted financial statements, and methods for raising any needed external financing.17. The sunk cost should be incorporated into the capital budgeting analysis18. Growth options (real options) permit the firm to alter operations depending on how conditions change during the life of the project 19. The option to delay a project is always valuable. 20. An abandonment option is the ability to discontinue a project if the operating cash flow turns out to be lower than expected.