Question 1

An analysis which combines scenario analysis with sensitivity analysis 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 D

Question 2

The accounting break-even production quantity for a project is 5,600 units. The fixed costs are $39,650 and the contribution margin is $8. What is the projected depreciation expense?

Accepted Answer

A)  $4,480 
B)  $5,100 
C)  $5,150 
D)  $5,320 
E)  $5,600 
A)  $4,480 
B)  $5,100 
C)  $5,150 
D)  $5,320 
E)  $5,600 C

Question 3

Simulation analysis is based on assigning a _____ and analyzing the results.

Accepted Answer

A)  narrow range of values to a single variable 
B)  narrow range of values to multiple variables simultaneously 
C)  wide range of values to a single variable 
D)  wide range of values to multiple variables simultaneously 
E)  single value to each of the variables 
A)  narrow range of values to a single variable 
B)  narrow range of values to multiple variables simultaneously 
C)  wide range of values to a single variable 
D)  wide range of values to multiple variables simultaneously 
E)  single value to each of the variables D

Question 4

The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even.

Accepted Answer

A)  operational 
B)  leveraged 
C)  accounting 
D)  cash 
E)  present value 
A)  operational 
B)  leveraged 
C)  accounting 
D)  cash 
E)  present value

Question 5

Which one of the following is most likely a variable cost?

Accepted Answer

A)  Office rent 
B)  Property taxes 
C)  Property insurance 
D)  Direct labor costs 
E)  Management salaries 
A)  Office rent 
B)  Property taxes 
C)  Property insurance 
D)  Direct labor costs 
E)  Management salaries

Question 6

Thompson & Son has been busy analyzing a new product. It has determined that an operating cash flow of $16,700 will result in a zero net present value,which is a company requirement for project acceptance. The fixed costs are $12,378 and the contribution margin is $6.20. The company feels that it can realistically capture 10% of the 50,000 unit market for this product. Should the company develop the new product? Why or why not?

Accepted Answer

A)  Yes; because 5,000 units of sales exceeds the quantity required for a zero net present value 
B)  Yes; because the internal break-even point is less than 5,000 units 
C)  No; because the firm cannot generate sufficient sales to obtain at least a zero net present value 
D)  No; because the project has an expected internal rate of return of negative 100% 
E)  No; because the project will not pay back on a discounted basis 
A)  Yes; because 5,000 units of sales exceeds the quantity required for a zero net present value 
B)  Yes; because the internal break-even point is less than 5,000 units 
C)  No; because the firm cannot generate sufficient sales to obtain at least a zero net present value 
D)  No; because the project has an expected internal rate of return of negative 100% 
E)  No; because the project will not pay back on a discounted basis

Question 7

Fixed production costs are:

Accepted Answer

A)  directly related to labor costs. 
B)  measured as cost per unit of time. 
C)  measured as cost per unit of output. 
D)  dependent on the amount of goods or services produced. 
E)  None of these. 
A)  directly related to labor costs. 
B)  measured as cost per unit of time. 
C)  measured as cost per unit of output. 
D)  dependent on the amount of goods or services produced. 
E)  None of these.

Question 8

A project has a contribution margin of $5,projected fixed costs of $10,000,a projected variable cost per unit of $12,and a projected present value break-even point of 6,000 units. What is the operating cash flow at this level of output?

Accepted Answer

A)  $2,000 
B)  $10,000 
C)  $20,000 
D)  $30,000 
E)  $120,000 
A)  $2,000 
B)  $10,000 
C)  $20,000 
D)  $30,000 
E)  $120,000

Question 9

Kurt Neal and Son is considering a project with a discounted payback just equal to the project's life. The projections include a sales price of $11,variable cost per unit of $8.50,and fixed costs of $4,500. The operating cash flow is $6,200. What is the break-even quantity?

Accepted Answer

A)  1,800 units 
B)  2,480 units 
C)  3,057 units 
D)  3,750 units 
E)  4,280 units 
A)  1,800 units 
B)  2,480 units 
C)  3,057 units 
D)  3,750 units 
E)  4,280 units

Question 10

The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000 units,give or take 4%. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6% range. The depreciation expense is $30,000. The tax rate is 34%. The sale price is estimated at $14 a unit,give or take 5%. The company bases its sensitivity analysis on the expected case scenario. What is the earnings before interest and taxes under the pessimistic case scenario?

Accepted Answer

A)  -$566.02 
B)  -$422.40 
C)  -$278.78 
D)  $3,554.50 
E)  $5,385.60 
A)  -$566.02 
B)  -$422.40 
C)  -$278.78 
D)  $3,554.50 
E)  $5,385.60

Question 11

Sensitivity analysis helps you determine the:

Accepted Answer

A)  range of possible outcomes given possible ranges for every variable. 
B)  degree to which the net present value reacts to changes in a single variable. 
C)  net present value given the best and the worst possible situations. 
D)  degree to which a project is reliant upon the fixed costs. 
E)  level of variable costs in relation to the fixed costs of a project. 
A)  range of possible outcomes given possible ranges for every variable. 
B)  degree to which the net present value reacts to changes in a single variable. 
C)  net present value given the best and the worst possible situations. 
D)  degree to which a project is reliant upon the fixed costs. 
E)  level of variable costs in relation to the fixed costs of a project.

Question 12

In a decision tree,caution should be used in the analysis because:

Accepted Answer

A)  early stage decisions are probably riskier and should not likely use the same discount rate. 
B)  if a negative NPV is actually occurring, management should opt out of the project and minimize the firm's loss. 
C)  decision trees are only used for financial planning. 
D)  Both early stage decisions are probably riskier and should not likely use the same discount rate; and decision trees are only used for financial planning. 
E)  Both early stage decisions are probably riskier and should not likely use the same discount rate; and if a negative NPV is actually occurring, management should opt out of the project and minimize the firm's loss. 
A)  early stage decisions are probably riskier and should not likely use the same discount rate. 
B)  if a negative NPV is actually occurring, management should opt out of the project and minimize the firm's loss. 
C)  decision trees are only used for financial planning. 
D)  Both early stage decisions are probably riskier and should not likely use the same discount rate; and decision trees are only used for financial planning. 
E)  Both early stage decisions are probably riskier and should not likely use the same discount rate; and if a negative NPV is actually occurring, management should opt out of the project and minimize the firm's loss.

Question 13

The approach that further attempts to model real world uncertainty by analyzing projects the way one might analyze gambling strategies is called:

Accepted Answer

A)  gambler's approach. 
B)  blackjack approach. 
C)  Monte Carlo simulation. 
D)  scenario analysis. 
E)  sensitivity analysis. 
A)  gambler's approach. 
B)  blackjack approach. 
C)  Monte Carlo simulation. 
D)  scenario analysis. 
E)  sensitivity analysis.

Question 14

The timing option that gives the option to wait: I. may be of minimal value if the project relates to a rapidly changing technology.
II) is partially dependent upon the discount rate applied to the project being evaluated.
III) is defined as the situation where operations are shut down for a period of time.
IV) has a value equal to the net present value of the project if it is started today versus the net present value if it is started at some later date.

Accepted Answer

A)  I and III only 
B)  II and IV only 
C)  I and II only 
D)  II, III, and IV only 
E)  I, II, and IV only 
A)  I and III only 
B)  II and IV only 
C)  I and II only 
D)  II, III, and IV only 
E)  I, II, and IV only

Question 15

Wilson's Meats has computed its fixed costs to be $.60 for every pound of meat it sells given an average daily sales level of 500 pounds. It charges $3.89 per pound of top-grade ground beef. The variable cost per pound is $2.99. What is the contribution margin per pound of ground beef sold?

Accepted Answer

A)  $0.30 
B)  $0.60 
C)  $0.90 
D)  $2.99 
E)  $3.89 
A)  $0.30 
B)  $0.60 
C)  $0.90 
D)  $2.99 
E)  $3.89

Question 16

The accounting break-even production quantity for a project is 5,425 units. The fixed costs are $31,600 and the contribution margin is $6. What is the projected depreciation expense?

Accepted Answer

A)  $700 
B)  $950 
C)  $1,025 
D)  $1,053 
E)  $1,100 
A)  $700 
B)  $950 
C)  $1,025 
D)  $1,053 
E)  $1,100

Question 17

An analysis of what happens to the estimate of the net present value when you examine a number of different likely situations 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 18

The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units,give or take 10%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5% range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit,give or take 2%. The company bases its sensitivity analysis on the expected case scenario What is the sales revenue under the optimistic case scenario?

Accepted Answer

A)  $40,000 
B)  $43,120 
C)  $44,000 
D)  $44,880 
E)  $48,400 
A)  $40,000 
B)  $43,120 
C)  $44,000 
D)  $44,880 
E)  $48,400

Question 19

The present value break-even point is superior to the accounting break-even point because:

Accepted Answer

A)  present value break-even is more complicated to calculate. 
B)  present value break-even covers the economic opportunity costs of the investment. 
C)  present value break-even is the same as sensitivity analysis. 
D)  present value break-even covers the fixed costs of production, which the accounting break-even does not. 
E)  present value break-even covers the variable costs of production, which the accounting break-even does not. 
A)  present value break-even is more complicated to calculate. 
B)  present value break-even covers the economic opportunity costs of the investment. 
C)  present value break-even is the same as sensitivity analysis. 
D)  present value break-even covers the fixed costs of production, which the accounting break-even does not. 
E)  present value break-even covers the variable costs of production, which the accounting break-even does not.

Question 20

The Meldrum Co. is analyzing a proposed project. The company expects to sell 3,000 units,give or take 15%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5% range. The depreciation expense is $4,000. The sale price is estimated at $18 a unit,give or take 2%. The company bases its sensitivity analysis on the expected case scenario. The company conducts a sensitivity analysis using a variable cost of $9. The total variable cost estimate will be:

Accepted Answer

A)  $22,950 
B)  $24,000 
C)  $25,500 
D)  $27,000 
E)  $31,050 
A)  $22,950 
B)  $24,000 
C)  $25,500 
D)  $27,000 
E)  $31,050

Exam 7: Risk Analysis, Real Options, and Capital Budgeting

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.

The accounting break-even production quantity for a project is 5,600 units. The fixed costs are $39,650 and the contribution margin is $8. What is the projected depreciation expense?

Simulation analysis is based on assigning a _____ and analyzing the results.

The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even.

Which one of the following is most likely a variable cost?

Fixed production costs are:

A project has a contribution margin of $5,projected fixed costs of $10,000,a projected variable cost per unit of $12,and a projected present value break-even point of 6,000 units. What is the operating cash flow at this level of output?

Kurt Neal and Son is considering a project with a discounted payback just equal to the project's life. The projections include a sales price of $11,variable cost per unit of $8.50,and fixed costs of $4,500. The operating cash flow is $6,200. What is the break-even quantity?

Sensitivity analysis helps you determine the:

In a decision tree,caution should be used in the analysis because:

The approach that further attempts to model real world uncertainty by analyzing projects the way one might analyze gambling strategies is called:

Wilson's Meats has computed its fixed costs to be $.60 for every pound of meat it sells given an average daily sales level of 500 pounds. It charges $3.89 per pound of top-grade ground beef. The variable cost per pound is $2.99. What is the contribution margin per pound of ground beef sold?

The accounting break-even production quantity for a project is 5,425 units. The fixed costs are $31,600 and the contribution margin is $6. What is the projected depreciation expense?

An analysis of what happens to the estimate of the net present value when you examine a number of different likely situations is called _____ analysis.

The present value break-even point is superior to the accounting break-even point because:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

Filters