Question 1

Can different discount rates be used for different stages in a decision tree?
 If so,what would be the benefit of such action?

Accepted Answer

One of the benefits of a multi-stage cap

Question 2

Consider the following statement by a project analyst: "I analyzed my project using scenarios for the base case,best case,and worst case. I computed break-evens and degrees of operating leverage. I did sensitivity analysis and simulation analysis. I computed NPV,IRR,payback,AAR,and PI. In the end,I have over a hundred different estimates and am more confused than ever. I would have been better off just sticking with my first estimate and going by my gut reaction." Critique this statement.

Accepted Answer

The goal of evaluating an NPV estimate o

Question 3

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 is conducting a sensitivity analysis on the sales price using a sales price estimate of $17. Using this value,the earnings before interest and taxes will be:

Accepted Answer

A)  $7,500 
B)  $8,000 
C)  $10,500 
D)  $14,000 
E)  $23,500 
A)  $7,500 
B)  $8,000 
C)  $10,500 
D)  $14,000 
E)  $23,500

Question 4

Discuss two shortcomings in the standard decision tree analysis that a financial manager should be cognizant of?

Accepted Answer

First,there is differential risk at vari

Question 5

Monte Carlo simulation is:

Accepted Answer

A)  the method of analysis most widely used by executives. 
B)  a very simple formula. 
C)  more complex than sensitivity or scenario analysis. 
D)  the oldest capital budgeting technique. 
E)  None of these. 
A)  the method of analysis most widely used by executives. 
B)  a very simple formula. 
C)  more complex than sensitivity or scenario analysis. 
D)  the oldest capital budgeting technique. 
E)  None of these.

Question 6

In a decision tree,the NPV to make the yes/no decision is dependent on:

Accepted Answer

A)  only the cash flows from successful path. 
B)  on the path where the probabilities add up to one. 
C)  all cash flows and probabilities. 
D)  only the cash flows and probabilities of the successful path. 
E)  None of these. 
A)  only the cash flows from successful path. 
B)  on the path where the probabilities add up to one. 
C)  all cash flows and probabilities. 
D)  only the cash flows and probabilities of the successful path. 
E)  None of these.

Question 7

Marguerite is reviewing a project with projected sales of 1,500 units a year,a cash flow of $40 a unit and a three-year project life. The initial cost of the project is $95,000. The relevant discount rate is 15%. Marguerite has the option to abandon the project after one year at which time she feels she could sell the project for $60,000. At what level of sales should she be willing to abandon the project?

Accepted Answer

A)  899 units 
B)  923 units 
C)  967 units 
D)  1,199 units 
E)  1,206 units 
A)  899 units 
B)  923 units 
C)  967 units 
D)  1,199 units 
E)  1,206 units

Question 8

Including the option to expand in your project analysis will tend to:

Accepted Answer

A)  extend the duration of a project but not affect the project's net present value. 
B)  increase the cash flows of a project but decrease the project's net present value. 
C)  increase the net present value of a project. 
D)  decrease the net present value of a project. 
E)  have no effect on either a project's cash flows or its net present valuE. 
A)  extend the duration of a project but not affect the project's net present value. 
B)  increase the cash flows of a project but decrease the project's net present value. 
C)  increase the net present value of a project. 
D)  decrease the net present value of a project. 
E)  have no effect on either a project's cash flows or its net present valuE.

Question 9

Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 12%. The firm expects to sell 2,100 units a year. The cash flow per unit is $20. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $50,000. At what level of sales should the firm be willing to abandon this project?

Accepted Answer

A)  420 units 
B)  1,041 units 
C)  1,479 units 
D)  1,618 units 
E)  2,500 units 
A)  420 units 
B)  1,041 units 
C)  1,479 units 
D)  1,618 units 
E)  2,500 units

Question 10

Which of the following statements are correct concerning the present value break-even point of a project?
I. The present value of the cash inflows equals the amount of the initial investment.
II. The payback period of the project is equal to the life of the project.
III. The operating cash flow is at a level that produces a net present value of zero.
IV. The project never pays back on a discounted basis.

Accepted Answer

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

Question 11

The Highlight Company has the following cost information on its new prospective project. Calculate the accounting break-even point.
Initial investment: $800
Fixed costs: $300 per year
Variable costs: $4 per unit
Depreciation: $140 per year
Price: $8 per unit
Discount rate: 12%
Project life: 5 years
Tax rate: 34%

Accepted Answer

A)  62 units per year 
B)  75 units per year 
C)  100 units per year 
D)  103 units per year 
E)  110 units per year 
A)  62 units per year 
B)  75 units per year 
C)  100 units per year 
D)  103 units per year 
E)  110 units per year

Question 12

The Quorum Company has the following cost information on its new prospective project. Calculate the present value break-even point.
Initial investment: $700
Fixed costs are $300 per year
Variable costs: $3 per unit
Depreciation: $100 per year
Price: $8 per unit
Discount rate: 12%
Project life: 3 years
Tax rate: 34%

Accepted Answer

A)  80 units per year 
B)  95 units per year 
C)  139 units per year 
D)  144 units per year 
E)  152 units per year 
A)  80 units per year 
B)  95 units per year 
C)  139 units per year 
D)  144 units per year 
E)  152 units per year

Question 13

The Quick-Start Company has the following pattern of potential cash flows with its planned investment in a new cold weather starting system for fuel injected cars. If the company has a discount rate of 17%,should it decide to invest?

Accepted Answer

A)  Yes, NPV = $2.2 million 
B)  Yes, NPV = $21.6 million 
C)  No, NPV = -$1.9 million 
D)  Yes, NPV = $8.6 million 
E)  No, since more than one branch is NPV = 0 or negative, the firm must reject. 
A)  Yes, NPV = $2.2 million 
B)  Yes, NPV = $21.6 million 
C)  No, NPV = -$1.9 million 
D)  Yes, NPV = $8.6 million 
E)  No, since more than one branch is NPV = 0 or negative, the firm must reject.

Question 14

An analysis of the relationship between the sales volume and various measures of profitability 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 15

The Mini-Max Company has the following cost information on its new prospective project. Calculate the accounting break-even point.
Initial investment: $700
Fixed costs: $200 per year
Variable costs: $3 per unit
Depreciation: $140 per year
Price: $8 per unit
Discount rate: 12%
Project life: 5 years
Tax rate: 34%

Accepted Answer

A)  25 units per year 
B)  68 units per year 
C)  103 units per year 
D)  113 units per year 
E)  None of these. 
A)  25 units per year 
B)  68 units per year 
C)  103 units per year 
D)  113 units per year 
E)  None of these.

Question 16

Quirk and Company has been busy analyzing a new product. It has determined that an operating cash flow of $18,500 will result in a zero net present value,which is a company requirement for project acceptance. The fixed costs are $14,000 and the contribution margin is $8.00. The company feels that it can realistically capture 10% of the 40,000 unit market for this product. Should the company develop the new product? Why or why not?

Accepted Answer

A)  No; because 4,000 units of sales is less than the quantity required for a zero net present value 
B)  No; because the internal break-even point is greater than 4,000 units 
C)  Yes; because the firm can generate sufficient sales to obtain at least a zero net present value 
D)  Yes; because the project has an expected internal rate of return of 100% 
E)  Yes; because the project will pay back on a discounted basis 
A)  No; because 4,000 units of sales is less than the quantity required for a zero net present value 
B)  No; because the internal break-even point is greater than 4,000 units 
C)  Yes; because the firm can generate sufficient sales to obtain at least a zero net present value 
D)  Yes; because the project has an expected internal rate of return of 100% 
E)  Yes; because the project will pay back on a discounted basis

Question 17

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 expected case scenario?

Accepted Answer

A)  $18,000 
B)  $24,000 
C)  $36,000 
D)  $48,000 
E)  $54,000 
A)  $18,000 
B)  $24,000 
C)  $36,000 
D)  $48,000 
E)  $54,000

Question 18

Sensitivity analysis evaluates the NPV with respect to:

Accepted Answer

A)  changes in the underlying assumptions. 
B)  one variable changing while holding the others constant. 
C)  different economic conditions. 
D)  All of these. 
E)  None of these. 
A)  changes in the underlying assumptions. 
B)  one variable changing while holding the others constant. 
C)  different economic conditions. 
D)  All of these. 
E)  None of these.

Question 19

Which of the following statements concerning variable costs is (are) correct?
I. Variable costs minus fixed costs equal marginal costs.
II. Variable costs are equal to zero when production is equal to zero.
III. An increase in variable costs increases the operating cash flow.

Accepted Answer

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

Question 20

Which of the following are types of break-even analysis?

Accepted Answer

A)  Present value break-even 
B)  Accounting profit break-even 
C)  Market value break-even 
D)  Both present value break-even; and accounting profit break-even 
E)  Both present value break-even; and market value break-even 
A)  Present value break-even 
B)  Accounting profit break-even 
C)  Market value break-even 
D)  Both present value break-even; and accounting profit break-even 
E)  Both present value break-even; and market value break-even

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

Can different discount rates be used for different stages in a decision tree? If so,what would be the benefit of such action?

Discuss two shortcomings in the standard decision tree analysis that a financial manager should be cognizant of?

Monte Carlo simulation is:

In a decision tree,the NPV to make the yes/no decision is dependent on:

Including the option to expand in your project analysis will tend to:

The Quick-Start Company has the following pattern of potential cash flows with its planned investment in a new cold weather starting system for fuel injected cars. If the company has a discount rate of 17%,should it decide to invest?

An analysis of the relationship between the sales volume and various measures of profitability is called _____ analysis.

Sensitivity analysis evaluates the NPV with respect to:

Which of the following statements concerning variable costs is (are) correct? I. Variable costs minus fixed costs equal marginal costs. II. Variable costs are equal to zero when production is equal to zero. III. An increase in variable costs increases the operating cash flow.

Which of the following are types of break-even analysis?

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

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