Question 1

In the present value break-even,the EAC is used to:

Accepted Answer

A) determine the salvage value of the initial fixed asset investment. 
B) allocate depreciation over the life of the project. 
C) allocate the initial investment at its opportunity cost over the life of the project. 
D) determine the contribution margin to fixed costs ratio. 
E) allocate the opportunity and erosion costs over the life of the project. 
A) determine the salvage value of the initial fixed asset investment. 
B) allocate depreciation over the life of the project. 
C) allocate the initial investment at its opportunity cost over the life of the project. 
D) determine the contribution margin to fixed costs ratio. 
E) allocate the opportunity and erosion costs over the life of the project. C

Question 2

Break-even analysis:

Accepted Answer

A) based on accounting profits is preferable to the financial (or present value)break-even method. 
B) identifies the optimal maximum level of output for any given level of fixed assets. 
C) ignores both taxes and interest when computing the financial break-even point. 
D) provides a means of determining the minimal number of units that need to be sold to prevent a financial loss. 
E) identifies the optimal sales price for any new product. 
A) based on accounting profits is preferable to the financial (or present value)break-even method. 
B) identifies the optimal maximum level of output for any given level of fixed assets. 
C) ignores both taxes and interest when computing the financial break-even point. 
D) provides a means of determining the minimal number of units that need to be sold to prevent a financial loss. 
E) identifies the optimal sales price for any new product. D

Question 3

An analysis of what happens to the estimate of a project's net present value when you examine a vast number of different likely economic 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 D

Question 4

Kurt's Interiors is considering a project with a sales price of $11,variable cost per unit of $8.50,and annual fixed costs of $134,500.The tax rate is 23 percent and the discount rate is 14 percent.The project requires $224,000 of fixed assets that will be worthless at the end of the 4-year project.What is the present value break-even point in units per year if the firm uses straight line depreciation?

Accepted Answer

A) 88,808 
B) 92,480 
C) 93,057 
D) 93,750 
E) 87,046 
A) 88,808 
B) 92,480 
C) 93,057 
D) 93,750 
E) 87,046

Question 5

As the degree of sensitivity of a project to a single variable rises,the:

Accepted Answer

A) lower the forecasting risk of the project. 
B) smaller the range of possible outcomes given a pre-defined range of values for the input. 
C) more attention management should place on accurately forecasting that variable. 
D) lower the maximum potential value of the project. 
E) lower the maximum potential loss of the project. 
A) lower the forecasting risk of the project. 
B) smaller the range of possible outcomes given a pre-defined range of values for the input. 
C) more attention management should place on accurately forecasting that variable. 
D) lower the maximum potential value of the project. 
E) lower the maximum potential loss of the project.

Question 6

The financial break-even point is superior to the accounting break-even point because the financial break-even method:

Accepted Answer

A) is more complicated to calculate. 
B) covers the economic opportunity costs of the investment. 
C) is equivalent to sensitivity analysis. 
D) covers the fixed costs of production,which the accounting break-even does not. 
E) provides an economic profit over and above the required rate of return. 
A) is more complicated to calculate. 
B) covers the economic opportunity costs of the investment. 
C) is equivalent to sensitivity analysis. 
D) covers the fixed costs of production,which the accounting break-even does not. 
E) provides an economic profit over and above the required rate of return.

Question 7

A proposed 12-month project has fixed costs of $3,600,depreciation expense of $1,500,and a sales quantity of 1,300 units.What is the contribution margin if the projected level of sales is the accounting break-even point?

Accepted Answer

A) $3.92 
B) $4.14 
C) $4.50 
D) $4.80 
E) $5.00 
A) $3.92 
B) $4.14 
C) $4.50 
D) $4.80 
E) $5.00

Question 8

Stage 2 of a decision tree shows that if a project is successful,the payoff will be $53,000 with a 2/3 chance of occurrence.There is also the 1/3 chance of a −$24,000 payoff.The cost of getting to Stage 2 (1 year out)is $24,000.The cost of capital is 15 percent.What is the NPV of the project at Stage 1?

Accepted Answer

A) −$349.16 
B) −$231.88 
C) $108.17 
D) $133.33 
E) $147.59 
A) −$349.16 
B) −$231.88 
C) $108.17 
D) $133.33 
E) $147.59

Question 9

The projections for a new one-year project show sales of 8,500 units,± 5 percent; variable costs per unit of $28.62,± 3 percent; and fixed costs of $164,000,± 3 percent.Depreciation is $62,000 and the tax rate is 23 percent.The sale price is $55 a unit,± 2 percent.The company bases its sensitivity analysis on the expected scenario.What is the operating cash flow for a sensitivity analysis using total fixed costs of $170,000?

Accepted Answer

A) $62,406.67 
B) $58,219.90 
C) $61,311.07 
D) $56,017.10 
E) $52,048.80 
A) $62,406.67 
B) $58,219.90 
C) $61,311.07 
D) $56,017.10 
E) $52,048.80

Question 10

The Meldrum Co.expects to sell 3,000 units,± 15 percent,of a new product.The variable cost per unit is $8,± 5 percent,and the annual fixed costs are $12,500,± 5 percent.The annual depreciation expense is $4,000 and the sale price is $18 a unit,± 2 percent.The project requires $24,000 of fixed assets which will be worthless when the project ends in six years.Also required is $6,500 of net working capital for the life of the project.The tax rate is 21 percent and the required rate of return is 12 percent.What is the net present value of the pessimistic scenario?

Accepted Answer

A) $12,979.40 
B) $14,008.16 
C) $13,810.29 
D) $10,146.18 
E) $8,308.15 
A) $12,979.40 
B) $14,008.16 
C) $13,810.29 
D) $10,146.18 
E) $8,308.15

Question 11

Explain the primary benefit of sensitivity analysis and explain why that benefit cannot be realized by conducting scenario analysis.

Accepted Answer

The primary benefit of sensitivity analy

Question 12

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) most commonly applied to small,short-term projects. 
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) most commonly applied to small,short-term projects.

Question 13

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 14

Which one of the following statements is correct when a project is operating at its accounting profit break-even point?

Accepted Answer

A) The project is just recovering the cost of the initial investment. 
B) The aftertax profit is equal to the initial investment. 
C) The project just pays back on a discounted basis. 
D) The project's IRR is equal to zero. 
E) The contribution margin is equal to zero. 
A) The project is just recovering the cost of the initial investment. 
B) The aftertax profit is equal to the initial investment. 
C) The project just pays back on a discounted basis. 
D) The project's IRR is equal to zero. 
E) The contribution margin is equal to zero.

Question 15

Utilizing a decision tree,the NPV used to make the decision to commence the testing for a project is dependent on:

Accepted Answer

A) only the cash flows related to the actual test. 
B) the path with the highest probability of occurrence. 
C) all the project's cash flows and probabilities over the project's entire life. 
D) only the cash flows and probabilities of the most successful path. 
E) the cash flows and probabilities for the first year of the project's life. 
A) only the cash flows related to the actual test. 
B) the path with the highest probability of occurrence. 
C) all the project's cash flows and probabilities over the project's entire life. 
D) only the cash flows and probabilities of the most successful path. 
E) the cash flows and probabilities for the first year of the project's life.

Question 16

Which one of the following statements is correct?

Accepted Answer

A) An increase in the initial fixed assets required by a project will increase the accounting profit break-even point. 
B) If a firm needs to lower a project's break-even points,it should lower the project's revenue estimate. 
C) The NPV is zero at the accounting break-even point. 
D) An increase in the tax rate will increase the accounting break-even point. 
E) Depreciating project assets more rapidly will decrease the accounting break-even point. 
A) An increase in the initial fixed assets required by a project will increase the accounting profit break-even point. 
B) If a firm needs to lower a project's break-even points,it should lower the project's revenue estimate. 
C) The NPV is zero at the accounting break-even point. 
D) An increase in the tax rate will increase the accounting break-even point. 
E) Depreciating project assets more rapidly will decrease the accounting break-even point.

Question 17

Adept Co.is analyzing a proposed project with annual sales of 5,200 units,± 6 percent; variable costs per unit of $11,± 3 percent; fixed costs of $17,500 per year,± 3 percent; and a sales price of $22 per unit,± 2 percent.The annual depreciation expense is $4,200.What is the annual sales revenue under the optimistic case scenario?

Accepted Answer

A) $105,385 
B) $116,688 
C) $127,474 
D) $123,689 
E) $109,408 
A) $105,385 
B) $116,688 
C) $127,474 
D) $123,689 
E) $109,408

Question 18

A firm is reviewing a project with a labor cost of $18.90 per unit,raw materials cost of $21.63 a unit,and fixed costs of $8,000 a month.Sales are projected at 7,200 units total for the 3-year life of the project.What are the total variable costs per year?

Accepted Answer

A) $106,300 
B) $99,300 
C) $97,272 
D) $103,300 
E) $109,300 
A) $106,300 
B) $99,300 
C) $97,272 
D) $103,300 
E) $109,300

Question 19

The Mini-Max Company has a prospective 5-year project with an initial cost of $318,900,annual fixed costs of $45,200,variable costs per unit of $16.78,and a sales price of $29.95.The discount rate is 13 percent and the tax rate is 24 percent.The firm uses straight-line depreciation over a project's life for all fixed assets.What is the accounting break-even point in units per year?

Accepted Answer

A) 7,850 
B) 8,275 
C) 10,315 
D) 11,304 
E) 11,429 
A) 7,850 
B) 8,275 
C) 10,315 
D) 11,304 
E) 11,429

Question 20

An analysis of the relationship between the sales volume and accounting 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

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

In the present value break-even,the EAC is used to:

Break-even analysis:

An analysis of what happens to the estimate of a project's net present value when you examine a vast number of different likely economic situations is called ________ analysis.

As the degree of sensitivity of a project to a single variable rises,the:

The financial break-even point is superior to the accounting break-even point because the financial break-even method:

A proposed 12-month project has fixed costs of $3,600,depreciation expense of $1,500,and a sales quantity of 1,300 units.What is the contribution margin if the projected level of sales is the accounting break-even point?

Explain the primary benefit of sensitivity analysis and explain why that benefit cannot be realized by conducting scenario analysis.

Monte Carlo simulation is:

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:

Which one of the following statements is correct when a project is operating at its accounting profit break-even point?

Utilizing a decision tree,the NPV used to make the decision to commence the testing for a project is dependent on:

Which one of the following statements is correct?

A firm is reviewing a project with a labor cost of $18.90 per unit,raw materials cost of $21.63 a unit,and fixed costs of $8,000 a month.Sales are projected at 7,200 units total for the 3-year life of the project.What are the total variable costs per year?

An analysis of the relationship between the sales volume and accounting profitability is called ________ analysis.

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and 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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