Question 1

Variable costs:

Accepted Answer

A)  change in direct relationship to the quantity of output produced. 
B)  are constant in the short-run regardless of the quantity of output produced. 
C)  are equal to the change in a variable when one more unit of output is produced. 
D)  are subtracted from fixed costs to compute the contribution margin. 
E)  form the basis that is used to determine the degree of operating leverage employed by a firm. 
A)  change in direct relationship to the quantity of output produced. 
B)  are constant in the short-run regardless of the quantity of output produced. 
C)  are equal to the change in a variable when one more unit of output is produced. 
D)  are subtracted from fixed costs to compute the contribution margin. 
E)  form the basis that is used to determine the degree of operating leverage employed by a firm.

Question 2

A project has earnings before interest and taxes of $5,750,fixed costs of $50,000,a selling price of $13 a unit,and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable cost per unit?

Accepted Answer

A)  $6.75 
B)  $7.00 
C)  $7.25 
D)  $7.50 
E)  $7.75 
A)  $6.75 
B)  $7.00 
C)  $7.25 
D)  $7.50 
E)  $7.75

Question 3

Theoretically,the NPV is the most appropriate method to determine the acceptability of a project. A false sense of security can overcome the decision-maker when the procedure is applied properly but the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by:

Accepted Answer

A)  changing the underlying assumptions on which the decision is based. 
B)  highlights the areas where more and better data are needed. 
C)  providing a picture of how an event can affect the calculations. 
D)  All of these. 
E)  None of these. 
A)  changing the underlying assumptions on which the decision is based. 
B)  highlights the areas where more and better data are needed. 
C)  providing a picture of how an event can affect the calculations. 
D)  All of these. 
E)  None of these.

Question 4

The Marx Brewing Company recently installed a new bottling machine. The machine's initial cost is $2,000,and can be depreciated on a straight line basis to a zero salvage in 5 years. The machine's fixed cost per year is $1,800,and its variable cost is $0.50 per unit. The selling price per unit is $1.50. Marx's tax rate is 34%,and it uses a 16% discount rate. Calculate the accounting break-even point on the new machine,as well as the present value break-even point on the new machine.

Accepted Answer

Accounting break-even is:
($1,800 + $400

Question 5

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 contribution margin under the expected case scenario?

Accepted Answer

A)  $2.67 
B)  $3.00 
C)  $7.92 
D)  $8.00 
E)  $8.72 
A)  $2.67 
B)  $3.00 
C)  $7.92 
D)  $8.00 
E)  $8.72

Question 6

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%,what is the value closest to time 1 net present value?

Accepted Answer

A)  $48.6 million 
B)  $80.9 million 
C)  $108.2 million 
D)  $181.4 million 
E)  None of these. 
A)  $48.6 million 
B)  $80.9 million 
C)  $108.2 million 
D)  $181.4 million 
E)  None of these.

Question 7

Sensitivity analysis is a method which allows for evaluation of the NPV given a series of changes to the underlying assumptions. Discuss why and how scenario analysis is used in addition to sensitivity analysis.

Accepted Answer

Sensitivity analysis:
measures result of

Question 8

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

Accepted Answer

A)  $1,000 
B)  $12,000 
C)  $13,000 
D)  $68,000 
E)  $73,000 
A)  $1,000 
B)  $12,000 
C)  $13,000 
D)  $68,000 
E)  $73,000

Question 9

Ryan Industries is considering a project with a discounted payback just equal to the project's life. The projections include a sales price of $12,variable cost per unit of $9,and fixed costs of $5,000. The operating cash flow is $8,000. What is the break-even quantity?

Accepted Answer

A)  1,900 units 
B)  2,679 units 
C)  3,250 units 
D)  4,000 units 
E)  4,333 units 
A)  1,900 units 
B)  2,679 units 
C)  3,250 units 
D)  4,000 units 
E)  4,333 units

Question 10

A firm is reviewing a project with a labor cost of $8.90 per unit,raw materials cost of $21.63 a unit,and fixed costs of $8,000 a month. Sales are projected at 10,000 units over the three-month life of the project. What are the total variable costs of the project?

Accepted Answer

A)  $216,300 
B)  $297,300 
C)  $305,300 
D)  $313,300 
E)  $329,300 
A)  $216,300 
B)  $297,300 
C)  $305,300 
D)  $313,300 
E)  $329,300

Question 11

From the information below,calculate the accounting break-even point.
Initial investment: $2,000
Fixed costs are $2,000 per year
Variable costs: $68 per unit
Depreciation: $300 per year
Price: $25 per unit
Discount rate: 10%
Project life: 4 years
Tax rate: 34%

Accepted Answer

A)  88 units per year 
B)  89 units per year 
C)  92 units per year 
D)  135 units per year 
E)  136 units per year 
A)  88 units per year 
B)  89 units per year 
C)  92 units per year 
D)  135 units per year 
E)  136 units per year

Question 12

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 contribution margin for a sensitivity analysis using a variable cost per unit of $8?

Accepted Answer

A)  $3 
B)  $4 
C)  $5 
D)  $6 
E)  $7 
A)  $3 
B)  $4 
C)  $5 
D)  $6 
E)  $7

Question 13

The sales level that results in a project's net income 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 14

Last month you introduced a new product to the market. Consumer demand has been overwhelming and it appears that strong demand will exist over the long-term. Given this situation,management should consider the option to:

Accepted Answer

A)  suspend. 
B)  expand. 
C)  abandon. 
D)  contract. 
E)  withdraw. 
A)  suspend. 
B)  expand. 
C)  abandon. 
D)  contract. 
E)  withdraw.

Question 15

A project has an accounting break-even point of 2,000 units. The fixed costs are $4,200 and the depreciation expense is $400. The projected variable cost per unit is $23.10. What is the projected sales price?

Accepted Answer

A)  $20.80 
B)  $21.00 
C)  $21.20 
D)  $25.40 
E)  $25.60 
A)  $20.80 
B)  $21.00 
C)  $21.20 
D)  $25.40 
E)  $25.60

Question 16

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. You are interested in knowing how the project will perform if the sales forecasts for years four and five of the project are revised such that there is a 50% chance that the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given your sales forecasts?

Accepted Answer

A)  $23,617 
B)  $23,719 
C)  $25,002 
D)  $26,877 
E)  $28,746 
A)  $23,617 
B)  $23,719 
C)  $25,002 
D)  $26,877 
E)  $28,746

Question 17

You are considering a new project. The project has projected depreciation of $720,fixed costs of $6,000,and total sales of $11,760. The variable cost per unit is $4.20. What is the accounting break-even level of production?

Accepted Answer

A)  1,200 units 
B)  1,334 units 
C)  1,372 units 
D)  1,889 units 
E)  1,910 units 
A)  1,200 units 
B)  1,334 units 
C)  1,372 units 
D)  1,889 units 
E)  1,910 units

Question 18

Scenario analysis is different than sensitivity analysis:

Accepted Answer

A)  because no economic forecasts are changed. 
B)  because several variables are changed together. 
C)  because scenario analysis deals with actual data versus sensitivity analysis which deals with a forecast. 
D)  because it is short and simple. 
E)  because it is a "by the seat of the pants" techniquE. 
A)  because no economic forecasts are changed. 
B)  because several variables are changed together. 
C)  because scenario analysis deals with actual data versus sensitivity analysis which deals with a forecast. 
D)  because it is short and simple. 
E)  because it is a "by the seat of the pants" techniquE.

Question 19

Sensitivity analysis provides information on:

Accepted Answer

A)  whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive. 
B)  the need for additional information as it tests each variable in isolation. 
C)  the degree of difficulty in changing multiple variables together. 
D)  Both whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive; and the need for additional information as it tests each variable in isolation. 
E)  Both whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive; and the degree of difficulty in changing multiple variables together. 
A)  whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive. 
B)  the need for additional information as it tests each variable in isolation. 
C)  the degree of difficulty in changing multiple variables together. 
D)  Both whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive; and the need for additional information as it tests each variable in isolation. 
E)  Both whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive; and the degree of difficulty in changing multiple variables together.

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

Variable costs:

A project has earnings before interest and taxes of $5,750,fixed costs of $50,000,a selling price of $13 a unit,and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable cost per unit?

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%,what is the value closest to time 1 net present value?

Sensitivity analysis is a method which allows for evaluation of the NPV given a series of changes to the underlying assumptions. Discuss why and how scenario analysis is used in addition to sensitivity analysis.

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

Ryan Industries is considering a project with a discounted payback just equal to the project's life. The projections include a sales price of $12,variable cost per unit of $9,and fixed costs of $5,000. The operating cash flow is $8,000. What is the break-even quantity?

A firm is reviewing a project with a labor cost of $8.90 per unit,raw materials cost of $21.63 a unit,and fixed costs of $8,000 a month. Sales are projected at 10,000 units over the three-month life of the project. What are the total variable costs of the project?

From the information below,calculate the accounting break-even point. Initial investment: $2,000 Fixed costs are $2,000 per year Variable costs: $68 per unit Depreciation: $300 per year Price: $25 per unit Discount rate: 10% Project life: 4 years Tax rate: 34%

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

Last month you introduced a new product to the market. Consumer demand has been overwhelming and it appears that strong demand will exist over the long-term. Given this situation,management should consider the option to:

A project has an accounting break-even point of 2,000 units. The fixed costs are $4,200 and the depreciation expense is $400. The projected variable cost per unit is $23.10. What is the projected sales price?

You are considering a new project. The project has projected depreciation of $720,fixed costs of $6,000,and total sales of $11,760. The variable cost per unit is $4.20. What is the accounting break-even level of production?

Scenario analysis is different than sensitivity analysis:

Sensitivity analysis provides information on:

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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