Question 1

The investment timing decision relates to:

Accepted Answer

A) how long the cash flows last once a project is implemented. 
B) the preferred starting date of a new project. 
C) how frequently the cash flows of a project occur. 
D) how many times a project can be expanded. 
E) how long a project should operate before an abandonment decision can be implemented. 
A) how long the cash flows last once a project is implemented. 
B) the preferred starting date of a new project. 
C) how frequently the cash flows of a project occur. 
D) how many times a project can be expanded. 
E) how long a project should operate before an abandonment decision can be implemented.

Question 2

A project requires an initial fixed asset investment of $148,000,has annual fixed costs of $39,800,a contribution margin of $14.62,a tax rate of 21 percent,a discount rate of 15 percent,and straight-line depreciation over the project's 3-year life.The assets will be worthless at the end of the project.What is the present value break-even point in units per year?

Accepted Answer

A) 6,086 
B) 7,613 
C) 7,504 
D) 7,438 
E) 7,911 
A) 6,086 
B) 7,613 
C) 7,504 
D) 7,438 
E) 7,911

Question 3

A new project has estimated annual sales of 12,000 units,± 3 percent; variable costs per unit of $11.24,± 2 percent; annual fixed costs of $38,290,± 2 percent; and a sales price of $19.65 per unit,± 4 percent.The annual depreciation is $21,400 and the tax rate is 21 percent.What are the annual earnings before interest and taxes under the optimistic scenario?

Accepted Answer

A) $52,694.40 
B) $64,854.40 
C) $57,516.89 
D) $54,048.91 
E) $61,940.08 
A) $52,694.40 
B) $64,854.40 
C) $57,516.89 
D) $54,048.91 
E) $61,940.08

Question 4

Southern Markets is considering a project with total sales of $17,500,total variable costs of $9,800,total fixed costs of $3,500,and estimated production of 400 units.The depreciation expense is $2,400 annually.What is the contribution margin per unit?

Accepted Answer

A) $4.50 
B) $10.50 
C) $14.14 
D) $19.09 
E) $19.25 
A) $4.50 
B) $10.50 
C) $14.14 
D) $19.09 
E) $19.25

Question 5

Wilson's Meats has fixed costs of $.60 for every pound of meat it sells given a sales level of 32,500 pounds.It charges $3.89 per pound while the variable cost per pound is $2.99.If depreciation is $16,400,what is the accounting profit break-even point?

Accepted Answer

A) 31,948 pounds 
B) 32,467 pounds 
C) 39,889 pounds 
D) 42,650 pounds 
E) 37,338 pounds 
A) 31,948 pounds 
B) 32,467 pounds 
C) 39,889 pounds 
D) 42,650 pounds 
E) 37,338 pounds

Question 6

A new 5-year project has expected sales of 3,400 units,± 8 percent; variable costs per unit of $22,± 2%; annual fixed costs of $47,500,± 2 percent; annual depreciation of $33,000; and a sale price of $45 a unit,± 3 percent.The project initially requires $165,000 of fixed assets and $42,000 of net working capital.At the end of the project,the net working capital will be recouped and the fixed assets will produce an aftertax cash inflow of $35,000.The tax rate is 21 percent and the discount rate is 14 percent.What is the net present value of the optimistic scenario?

Accepted Answer

A) −$28,026.15 
B) −$28,799.24 
C) −$22,584.66 
D) $21,202.98 
E) $18,566.01 
A) −$28,026.15 
B) −$28,799.24 
C) −$22,584.66 
D) $21,202.98 
E) $18,566.01

Question 7

An investment has an initial cash outflow of $210,000 for fixed assets that will be depreciated straight-line to zero over 4 years,which is the life of the project.The sales price is set at $19.95 a unit,the annual fixed costs are $237,000,and the variable cost per unit is $8.87.The tax rate is 22 percent and the discount rate is 11 percent.At what sales quantity per year will the investment break even on a financial basis?

Accepted Answer

A) 29,787 units 
B) 29,143 units 
C) 27,886 units 
D) 28,096 units 
E) 30,308 units 
A) 29,787 units 
B) 29,143 units 
C) 27,886 units 
D) 28,096 units 
E) 30,308 units

Question 8

Sensitivity analysis is primarily designed to determine the:

Accepted Answer

A) range of possible outcomes given the expected 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 expected situations. 
D) degree to which a project relies on financial leverage. 
E) best mix of fixed and variable costs for each project. 
A) range of possible outcomes given the expected 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 expected situations. 
D) degree to which a project relies on financial leverage. 
E) best mix of fixed and variable costs for each project.

Question 9

At a production level of 5,600 units,a project has total costs of $89,000 and a variable cost per unit of $11.20.What is the amount of the total fixed costs?

Accepted Answer

A) $24,126 
B) $26,280 
C) $27,090 
D) $27,820 
E) $28,626 
A) $24,126 
B) $26,280 
C) $27,090 
D) $27,820 
E) $28,626

Question 10

The accounting break-even production quantity for a project with a life of one year is 35,173 units.The fixed costs are $318,290 and the contribution margin is $13.27.What is the projected depreciation expense?

Accepted Answer

A) $142,734 
B) $148,456 
C) $110,025 
D) $113,053 
E) $122,082 
A) $142,734 
B) $148,456 
C) $110,025 
D) $113,053 
E) $122,082

Question 11

Wilson's Antiques is considering a project with an initial cost today of $10,000.The project has a life of 2 years with cash inflows of $6,500 a year.Should the firm decide to wait one year to commence this project,the initial cost will increase by 5 percent,and the cash inflows will increase to $7,500 a year.What is the value of the option to wait at a discount rate of 10 percent?

Accepted Answer

A) $1,006.76 
B) $1,235.54 
C) $1,509.28 
D) $1,606.76 
E) $1,735.54 
A) $1,006.76 
B) $1,235.54 
C) $1,509.28 
D) $1,606.76 
E) $1,735.54

Question 12

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

Question 13

All else equal,the contribution margin must increase as:

Accepted Answer

A) both the sales price and variable cost per unit increase. 
B) the fixed cost per unit declines. 
C) the variable cost per unit declines. 
D) sales price per unit declines. 
E) the sales price minus the fixed cost per unit increases. 
A) both the sales price and variable cost per unit increase. 
B) the fixed cost per unit declines. 
C) the variable cost per unit declines. 
D) sales price per unit declines. 
E) the sales price minus the fixed cost per unit increases.

Question 14

The accounting profit break-even point is unaffected by a firm's:

Accepted Answer

A) contribution margin. 
B) depreciation method. 
C) tax rate. 
D) fixed costs. 
E) variable cost per unit. 
A) contribution margin. 
B) depreciation method. 
C) tax rate. 
D) fixed costs. 
E) variable cost per unit.

Question 15

The contribution margin:

Accepted Answer

A) is dependent upon achieving a minimal level of output. 
B) increases as the level of output decreases. 
C) decreases as the level of output decreases. 
D) has a major effect on the present value break-even point. 
E) changes indirectly to a firm's tax rate changes. 
A) is dependent upon achieving a minimal level of output. 
B) increases as the level of output decreases. 
C) decreases as the level of output decreases. 
D) has a major effect on the present value break-even point. 
E) changes indirectly to a firm's tax rate changes.

Question 16

Management has decided to accept a new project but has yet to decide when the project should commence.Which type of analysis would be most helpful at this time?

Accepted Answer

A) Expansion analysis 
B) Timing option analysis 
C) Scenario analysis 
D) Sensitivity analysis 
E) Simulation analysis 
A) Expansion analysis 
B) Timing option analysis 
C) Scenario analysis 
D) Sensitivity analysis 
E) Simulation analysis

Question 17

A project has been assigned a discount rate of 12 percent.If the project starts immediately,it will have an initial cost of $480 and cash inflows of $350 a year for three years.If the start is delayed one year,the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years.What is the value of the option to wait?

Accepted Answer

A) $.70 
B) $1.08 
C) $1.67 
D) $2.20 
E) $.20 
A) $.70 
B) $1.08 
C) $1.67 
D) $2.20 
E) $.20

Question 18

To ascertain whether the inaccuracy of the variable cost estimate for a project will have much effect on the final outcome of the project,you should probably conduct ________ analysis.

Accepted Answer

A) leverage 
B) scenario 
C) break-even 
D) sensitivity 
E) cash flow 
A) leverage 
B) scenario 
C) break-even 
D) sensitivity 
E) cash flow

Question 19

Marguerite is reviewing a project with projected sales of 1,400 units a year,a cash flow of $39 a unit and project life of 3 years.The initial cost of the project is $94,000 and the discount rate is 14 percent.She has the option to abandon the project after one year at which time she feels she could sell the project for $63,000.At what quantity of annual sales should she be willing to abandon the project after the first year?

Accepted Answer

A) 899 units 
B) 981 units 
C) 967 units 
D) 1,199 units 
E) 1,006 units 
A) 899 units 
B) 981 units 
C) 967 units 
D) 1,199 units 
E) 1,006 units

Question 20

Brewster's is considering a project with a life of 5 years and an initial cost of $120,000.The discount rate for the project is 12 percent.The firm expects to sell 2,100 units a year at a net cash flow per unit of $20.The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000.The firm is interested in knowing how the project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year.What is the net present value of this project given these revised sales forecasts?

Accepted Answer

A) $23,617 
B) $23,719 
C) $25,002 
D) $26,877 
E) $28,745 
A) $23,617 
B) $23,719 
C) $25,002 
D) $26,877 
E) $28,745

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

The investment timing decision relates to:

Southern Markets is considering a project with total sales of $17,500,total variable costs of $9,800,total fixed costs of $3,500,and estimated production of 400 units.The depreciation expense is $2,400 annually.What is the contribution margin per unit?

Wilson's Meats has fixed costs of $.60 for every pound of meat it sells given a sales level of 32,500 pounds.It charges $3.89 per pound while the variable cost per pound is $2.99.If depreciation is $16,400,what is the accounting profit break-even point?

Sensitivity analysis is primarily designed to determine the:

At a production level of 5,600 units,a project has total costs of $89,000 and a variable cost per unit of $11.20.What is the amount of the total fixed costs?

The accounting break-even production quantity for a project with a life of one year is 35,173 units.The fixed costs are $318,290 and the contribution margin is $13.27.What is the projected depreciation expense?

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

All else equal,the contribution margin must increase as:

The accounting profit break-even point is unaffected by a firm's:

The contribution margin:

Management has decided to accept a new project but has yet to decide when the project should commence.Which type of analysis would be most helpful at this time?

To ascertain whether the inaccuracy of the variable cost estimate for a project will have much effect on the final outcome of the project,you should probably conduct ________ 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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