Q: Which formula correctly calculates Free Cash Flow (FCF) for a project?

$$\text{FCF} = (\text{Revenue} - \text{Costs} - \text{Depreciation}) \times (1 - \text{Tax rate}) + \text{Depreciation} - \text{CapEx} - \text{Change in NWC}$$

Q: Which of the following is the correct formula for calculating the book value of an asset?

$$\text{Book value} = \text{Original cost} - (\text{Annual depreciation} \times \text{Number of years owned})$$

Question 1

Which of the following is NOT considered an actual cash flow in the capital budgeting process?

Accepted Answer

Depreciation expense

Question 2

A company is considering a new project. Which of the following should be included when forecasting incremental earnings?

Accepted Answer

Only the additional revenues and costs directly resulting from the project

Question 3

Which formula correctly calculates Free Cash Flow (FCF) for a project?

Accepted Answer

$$	ext{FCF} = (	ext{Revenue} - 	ext{Costs} - 	ext{Depreciation}) 	imes (1 - 	ext{Tax rate}) + 	ext{Depreciation} - 	ext{CapEx} - 	ext{Change in NWC}$$

Question 4

If a project requires an increase in net working capital (NWC) in its first year, how does this affect the project's free cash flow for that year?

Accepted Answer

It decreases the free cash flow

Question 5

Which of the following is an example of a sunk cost in capital budgeting?

Accepted Answer

Past R&D expenses

Question 6

A company sells a machine for $$20,000. The book value is 15$$,000 and the tax rate is 30%. What is the tax owed on the sale?

Accepted Answer

$$1,500$$

Question 7

Which of the following best describes the concept of 'cannibalization' in project analysis?

Accepted Answer

A new product reduces the sales of an existing product

Question 8

Which of the following is a real option available to managers in capital budgeting?

Accepted Answer

The option to abandon a project if it becomes unprofitable

Question 9

Why are Treasury bills used as a benchmark in capital budgeting?

Accepted Answer

They represent a risk-free asset

Question 10

A project has the following cash flows: Initial outlay of $$100,000, annual incremental revenue of 50$$,000, annual incremental costs of $$20,000, depreciation of 10$$,000 per year, tax rate of 25%, and no change in NWC. What is the project's annual free cash flow?

Accepted Answer

$$27,500$$

Question 11

Which of the following is a common pitfall when identifying a project's incremental free cash flows?

Accepted Answer

Including sunk costs in the analysis

Question 12

What is the main purpose of sensitivity analysis in project evaluation?

Accepted Answer

To assess how changes in key assumptions affect the project's net present value

Question 13

Which of the following is the correct formula for calculating the book value of an asset?

Accepted Answer

$$	ext{Book value} = 	ext{Original cost} - (	ext{Annual depreciation} 	imes 	ext{Number of years owned})$$

Question 14

A company is considering delaying a project by one year. Which of the following is a potential benefit of this real option?

Accepted Answer

The company can wait for more information to reduce uncertainty

Question 15

Which of the following is an example of an opportunity cost in capital budgeting?

Accepted Answer

The value of land that could be sold if not used for the project

Capital Budgeting: Cash Flows, Earnings, and Project Analysis

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