Question

Q1. Opportunity cost could be described as:

a.The Net present value of $1

b.Costs which are associated with the selected alternative

c.Forgone income from an unselected alternative

Q2. Historical cost is almost always:

a.a relevant cost

b.a sunk cost

c.both a & b

Q3. Comparing incremental costs of two alternatives is called:

a.comparative analysis

b.differential analysis

c.total project approach

Q4. The Time Value of Money principle states that:

a.$1 today is worth more than $1 five years from now

b.$1 five years from now is worth more than $1 today

c.$1 today is worth less than $1 five years from now

Q5. Discounted cash flow methods rely heavily on the following assumption:

a.future cash flows are certain

b.the capital market is perfect

c.both a and b

Q6. The minimum acceptable rate of return should be based on:

a.the net present value of the investment

b.the risk involved in the investment

c.the future cash flows of the investment

Q7. This NPV approach only takes into account the incremental cash flows between two alternatives:

a.differential approach

b.incremental approach

c.total project approach

Q8. One limitation of the payback period model is that it only considers:

a.Time value of money

b.Interest

c.Initial capital outlay

Q9. The Net present value of Machine X less Machine Y is negative. This means that:

a.Machine X should be selected.

b.Machine Y should be selected.

c.Neither one should be selected, because both investments are unprofitable.

Q10. The following statement is not true of the post-audit process:

a.It should be conducted for every investment.

b.It can improve future decision making.

c.It can evaluate the effectiveness of cash flow predictions.

Answer 1

Q1. c.Forgone income from an unselected alternative

Q2. b.a sunk cost

Q3. b.differential analysis

Differential analysis is finding the differential cost, which is the difference in the cost of two alternatives. Differential cost is also known as incremental cost.

Q4. a.$1 today is worth more than $1 five years from now

Time value of money means that money loses value over time. So a $ 1 today would lose value with time and will be worth less in five years from now. So $ 1 today is more than $ 1 five years from now.