Question

1a. Which of the following is ignored during cash flow estimations?

		Depreciation
		Sunk Costs
		Fixed Costs
		Variable Costs

1b.

Which of the following occurs when a new project increases the sales and therefore the cash flows of an existing product?

		Erosion
		Sunk Costs
		Opportunity Costs
		Synergy

1c.

Which of the following method must be preferred if the number changes in the signs of future cash flows within the project’s economic life is more than one?

		IRR
		Payback Period
		Discounted Payback Period
		NPV

1d.

Which of the following does the estimation of the cash flows of a project depend on?

		Revenues
		Variable Costs
		Fixed Costs
		All

Answer 1

Question 1a:

The following is ignored during cash flow estimates

Sunk Cost - Ignored as it is already incurred and nothing to do with cash flow estimates

> Depreciation is an expense and considered for tax purposes in estimating cash flows

> Fixed Costs is an expense and considered in estimating the cash flows

> Variable Costs is an expense and considered in estimating the cash flows

Question 1b:

Erosion occurs when a new project increases the sales and therefore the cash flows of an existing product

> Opportunity cost is the opportunity lost due to the the project which is choosen

> Sunk Cost - Ignored as it is already incurred and nothing to do with cash flow estimates

> Synegry - more profits generated when two projects are choosen and worked together

Question 1c:

NPV (Net Present Value) method must be preferred if the number changes in the signs of future cash flows within the project’s economic life is more than one since it provides the precise value

IRR methods provides more than one when cash flows has more than one signs

Payback and Discounted payback methods will not provide one value and not able to decide payback periods since the negative cash flows occur in between

Question 1d:

The following does the estimation of cash flows depends on

> Fixed Costs

> Variable Costs

> Revenues