Corporate Finance MCQ - Corporate Finance Section 1

36 A large corporation embarks on an investment which exposes it to uncertainties and hence involves more people in the decision- making process. The project is most likely a:

New product or service would involve more uncertainties and complex decision making.

37 The post-audit stage of capital budgeting least likely includes:

Rescheduling and prioritizing projects is part of the planning stage of the capital budgeting process, not the post-audit.

38 When computing the cash flows for a capital project, which of the following is most likely to be included?

Capital budgeting cash flows are based on opportunity costs. Accounting income is different from capital budgeting cash flows since non-cash items are included in it. Financing costs are not included in a cash flow calculation but are considered in the calculation of the discount rate.

39 A company that sells energy drinks is evaluating an expansion of its production facilities to also produce soda drinks. The company’s marketing department recommended producing soda drinks as it would increase the company’s energy drinks sales because of an increase in brand awareness. What impact will the cash flows from the expected increase in energy drinks sales most likely have on the NPV of the soda drinks project?

The increase in energy drinks sales represents a positive externality that will increase the NPV of the project and should be included in the NPV analysis.

40 In the context of capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to consider:

Including interest costs in the cash flows would result in double-counting the cost of debt as they are already taken into account when the cash flows are discounted at the appropriate cost of capital.