Question 1

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function?

Accepted Answer

A)  The steepness of the function relates to the project's degree of operating leverage. 
B)  The steeper the function, the less sensitive the project is to changes in the sales quantity. 
C)  The resulting function will be a hyperbole. 
D)  The resulting function will include only positive values. 
E)  The slope of the function measures the sensitivity of the net present value to a change in sales quantity. 
A)  The steepness of the function relates to the project's degree of operating leverage. 
B)  The steeper the function, the less sensitive the project is to changes in the sales quantity. 
C)  The resulting function will be a hyperbole. 
D)  The resulting function will include only positive values. 
E)  The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

Question 2

Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $120,000. Annual sales are estimated at $189,000 and the tax rate is 21 percent. The net present value is negative $120,000. Based on this analysis, the project is expected to operate at the:

Accepted Answer

A)  maximum possible level of production. 
B)  minimum possible level of production. 
C)  financial break-even point. 
D)  accounting break-even point. 
E)  cash break-even point. 
A)  maximum possible level of production. 
B)  minimum possible level of production. 
C)  financial break-even point. 
D)  accounting break-even point. 
E)  cash break-even point.

Question 3

The contribution margin per unit is equal to the:

Accepted Answer

A)  sales price per unit minus the total costs per unit. 
B)  variable cost per unit minus the fixed cost per unit. 
C)  sales price per unit minus the variable cost per unit. 
D)  pretax profit per unit. 
E)  aftertax profit per unit. 
A)  sales price per unit minus the total costs per unit. 
B)  variable cost per unit minus the fixed cost per unit. 
C)  sales price per unit minus the variable cost per unit. 
D)  pretax profit per unit. 
E)  aftertax profit per unit.

Question 4

Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life. The projections include a sales price of $39, variable costs per unit of $14, and fixed costs of $238,000. The operating cash flow is $24,300. What is the break-even quantity?

Accepted Answer

A)  9,363 units 
B)  11,211 units 
C)  11,482 units 
D)  12,301 units 
E)  10,492 units 
A)  9,363 units 
B)  11,211 units 
C)  11,482 units 
D)  12,301 units 
E)  10,492 units

Question 5

A project has expected sales of 54,000 units, ±5 percent, variable cost per unit of $87, ±2 percent, fixed costs of $287,000, ±1 percent, and a sales price per unit of $219, ±2 percent. The depreciation expense is $47,000 and the tax rate is 23 percent. What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $85?

Accepted Answer

A)  $132 
B)  $134 
C)  $135 
D)  $136 
E)  $133 
A)  $132 
B)  $134 
C)  $135 
D)  $136 
E)  $133

Question 6

Spencer Tools would like to offer a special product to its best customers. However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment. The fixed costs are estimated at $27,400, the depreciation expense is $1,700, and the contribution margin per unit is $6.75. What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?

Accepted Answer

A)  3,220 units 
B)  4,059 units 
C)  2,815 units 
D)  4,233 units 
E)  4,658 units 
A)  3,220 units 
B)  4,059 units 
C)  2,815 units 
D)  4,233 units 
E)  4,658 units

Question 7

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?

Accepted Answer

A)  Sensitivity analysis; to identify the key variable that affects a project's profitability 
B)  Scenario analysis; to guarantee each project will be profitable 
C)  Cash breakeven; to ensure the firm recoups its initial investment 
D)  Accounting breakeven; to ensure each project earns its required rate of return 
E)  Financial breakeven; to ensure each project has a positive NPV 
A)  Sensitivity analysis; to identify the key variable that affects a project's profitability 
B)  Scenario analysis; to guarantee each project will be profitable 
C)  Cash breakeven; to ensure the firm recoups its initial investment 
D)  Accounting breakeven; to ensure each project earns its required rate of return 
E)  Financial breakeven; to ensure each project has a positive NPV

Question 8

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:

Accepted Answer

A)  operating at the accounting break-even point. 
B)  operating at the financial break-even point. 
C)  facing hard rationing. 
D)  operating with zero leverage. 
E)  operating at maximum capacity. 
A)  operating at the accounting break-even point. 
B)  operating at the financial break-even point. 
C)  facing hard rationing. 
D)  operating with zero leverage. 
E)  operating at maximum capacity.

Question 9

An analysis of the change in a project's NPV when a single variable is changed is called ________ analysis.

Accepted Answer

A)  forecasting 
B)  scenario 
C)  sensitivity 
D)  simulation 
E)  break-even 
A)  forecasting 
B)  scenario 
C)  sensitivity 
D)  simulation 
E)  break-even

Question 10

You are the manager of a project that has a degree of operating leverage of 1.84 and a required return of 15 percent. Due to the current state of the economy, you expect unit sales to decrease by 3.5 percent next year. What change should you expect in the operating cash flows next year given your sales prediction?

Accepted Answer

A)  6.44 percent decrease 
B)  4.50 percent decrease 
C)  5.34 percent decrease 
D)  6.44 percent increase 
E)  5.34 percent increase 
A)  6.44 percent decrease 
B)  4.50 percent decrease 
C)  5.34 percent decrease 
D)  6.44 percent increase 
E)  5.34 percent increase

Question 11

A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $842,900 per year. The tax rate is 23 percent and the required return is 11.5 percent. Suppose the projections given for price and quantity can vary by ±4 percent while variable and fixed cost estimates are accurate to within ±2 percent. What is the best-case NPV?

Accepted Answer

A)  $4,613 
B)  −$67,008 
C)  $127,511 
D)  $82,409 
E)  −$132,194 
A)  $4,613 
B)  −$67,008 
C)  $127,511 
D)  $82,409 
E)  −$132,194

Question 12

At a production level of 5,280 units, a project has total costs of $150,000. The variable cost per unit is $23.12. Assume the firm can increase production by 750 units without increasing its fixed costs. What will the total costs be if 6,000 units are produced?

Accepted Answer

A)  $122,780 
B)  $124,640 
C)  $138,720 
D)  $122,074 
E)  $166,646 
A)  $122,780 
B)  $124,640 
C)  $138,720 
D)  $122,074 
E)  $166,646

Question 13

A proposed project has fixed costs of $42,106 per year. The operating cash flow at 12,000 units is $56,900. Ignore taxes. What will be the new degree of operating leverage if the number of units sold rises to 12,600?

Accepted Answer

A)  1.46 
B)  1.68 
C)  1.57 
D)  1.74 
E)  1.82 
A)  1.46 
B)  1.68 
C)  1.57 
D)  1.74 
E)  1.82

Question 14

A project has an accounting break-even point of 7,264 units. The fixed costs are $164,800 and the projected variable cost per unit is $24.57. The project will require $398,000 for fixed assets which will be depreciated straight-line to zero over the project's four-year life. What is the projected sales price per unit?

Accepted Answer

A)  $56.59 
B)  $58.18 
C)  $64.02 
D)  $76.67 
E)  $60.95 
A)  $56.59 
B)  $58.18 
C)  $64.02 
D)  $76.67 
E)  $60.95

Question 15

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

Accepted Answer

A)  Scenario 
B)  Simulation 
C)  Break-even 
D)  Sensitivity 
E)  Cash flow 
A)  Scenario 
B)  Simulation 
C)  Break-even 
D)  Sensitivity 
E)  Cash flow

Question 16

In an effort to capture the large jet market, Hiro Airplanes invested $11.264 billion developing its B490, which is capable of carrying 840 passengers. The plane has a list price of $276.5 million. In discussing the plane, Hiro Airplanes stated that the company would break even when 253 B490s were sold. Assume the break-even sales figure given is the cash flow break-even. Suppose the sales of the B490 last for only 12 years. How many airplanes must Hiro sell per year to provide its shareholders a rate of return of 17 percent on this investment?

Accepted Answer

A)  50.17 
B)  52.48 
C)  50.72 
D)  53.10 
E)  54.40 
A)  50.17 
B)  52.48 
C)  50.72 
D)  53.10 
E)  54.40

Question 17

A proposed project has fixed costs of $39,480, depreciation expense of $8,724, and a sales quantity of 1,330 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point?

Accepted Answer

A)  $37.81 
B)  $34.63 
C)  $36.24 
D)  $35.16 
E)  $38.13 
A)  $37.81 
B)  $34.63 
C)  $36.24 
D)  $35.16 
E)  $38.13

Question 18

HiLo Mfg. is analyzing a project with anticipated sales of 12,500 units, ±2 percent. The variable cost per unit is $13, ± 2 percent, and the expected fixed costs are $237,000, ±1 percent. The sales price is estimated at $69 a unit, ±3 percent. The depreciation expense is $68,000 and the tax rate is 22 percent. What is the earnings before interest and taxes under the base-case scenario?

Accepted Answer

A)  $368,500 
B)  $421,000 
C)  $395,000 
D)  $414,900 
E)  $427,500 
A)  $368,500 
B)  $421,000 
C)  $395,000 
D)  $414,900 
E)  $427,500

Question 19

Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of:

Accepted Answer

A)  scenario analysis. 
B)  sensitivity analysis. 
C)  an operating leverage application. 
D)  soft rationing. 
E)  hard rationing. 
A)  scenario analysis. 
B)  sensitivity analysis. 
C)  an operating leverage application. 
D)  soft rationing. 
E)  hard rationing.

Question 20

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project:

Accepted Answer

A)  will never pay back. 
B)  has a zero net present value. 
C)  is operating at a higher level than if it were operating at its cash break-even level. 
D)  is operating at a higher level than if it were operating at its financial break-even level. 
E)  is lowering the total net income of the firm. 
A)  will never pay back. 
B)  has a zero net present value. 
C)  is operating at a higher level than if it were operating at its cash break-even level. 
D)  is operating at a higher level than if it were operating at its financial break-even level. 
E)  is lowering the total net income of the firm.

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function?

The contribution margin per unit is equal to the:

Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life. The projections include a sales price of $39, variable costs per unit of $14, and fixed costs of $238,000. The operating cash flow is $24,300. What is the break-even quantity?

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?

An analysis of the change in a project's NPV when a single variable is changed is called ________ analysis.

At a production level of 5,280 units, a project has total costs of $150,000. The variable cost per unit is $23.12. Assume the firm can increase production by 750 units without increasing its fixed costs. What will the total costs be if 6,000 units are produced?

A proposed project has fixed costs of $42,106 per year. The operating cash flow at 12,000 units is $56,900. Ignore taxes. What will be the new degree of operating leverage if the number of units sold rises to 12,600?

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

A proposed project has fixed costs of $39,480, depreciation expense of $8,724, and a sales quantity of 1,330 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point?

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters

Exam 11: Project Analysis and Evaluation

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function?

The contribution margin per unit is equal to the:

Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life. The projections include a sales price of $39, variable costs per unit of $14, and fixed costs of $238,000. The operating cash flow is $24,300. What is the break-even quantity?

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?

An analysis of the change in a project's NPV when a single variable is changed is called ________ analysis.

At a production level of 5,280 units, a project has total costs of $150,000. The variable cost per unit is $23.12. Assume the firm can increase production by 750 units without increasing its fixed costs. What will the total costs be if 6,000 units are produced?

A proposed project has fixed costs of $42,106 per year. The operating cash flow at 12,000 units is $56,900. Ignore taxes. What will be the new degree of operating leverage if the number of units sold rises to 12,600?

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

A proposed project has fixed costs of $39,480, depreciation expense of $8,724, and a sales quantity of 1,330 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point?

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters