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

The Meldrum Co.expects to sell 3,000 units,± 15 percent,of a new product.The variable cost per unit is $8,± 5 percent; annual fixed costs are $12,500,± 5 percent; annual depreciation is $4,000; and the sale price is $18 a unit,± 2 percent.What is the amount of the fixed cost per unit under the pessimistic scenario?

Fixed production costs are:

A project has a projected sales price of $99 a unit,variable costs per unit of $58,annual fixed costs of $238,000,and annual depreciation of $139,000.The tax rate is 22 percent.What is the contribution margin for an analysis using sales units of 12,800?

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:

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

The Quick-Start Company has the following pattern of potential cash flows for a new project. If the company has a discount rate of 17 percent,should it test the product? Why or why not?

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

The type of analysis that is most dependent upon the use of a computer is ________ analysis.

If you want the most detailed information possible about the potential outcome of a critical project you should conduct:

A project has a contribution margin of $2.16 per unit.If the sales price per unit is $11 and the fixed costs are $24,700,what is the amount of total costs at a production level of 6,000 units? Ignore depreciation.

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

A proposed 1-year project has a contribution margin of $5,fixed costs of $12,000,variable costs per unit of $12,depreciation of $30,000,an EAC of $41,185 and a tax rate of 21 percent.What is the present value break-even point in units?

Sensitivity analysis:

A project with a life of one year 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 option to wait:

What is the benefit of scenario analysis if it does not produce a definitive accept or reject decision for a proposed project?

A proposed project has estimated sales of 3,300 units per year,± 4 percent; a sales price of $23 a unit,± 1 percent; variable costs per unit of $12.60,± 2 percent; annual fixed costs of $16,200; and annual depreciation of $3,100.What is the contribution margin under the expected scenario?

Thompson's has determined that a new project has expected fixed costs of $132,378,a contribution margin of $36.20,and a tax rate of 21 percent.The investment has an initial cost of $548,000 that will be depreciated straight-line to zero over the 5-year life of the project.What is the expected present value break-even point in units per year if the discount rate is 15 percent?

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

Angie's expects annual sales of 2,400 units,± 3 percent,of a new product at a price of $59 a unit,± 2 percent.The expected variable cost per unit is $27.20,± 2 percent,annual fixed costs are $32,500,and depreciation is $4,400 per year.What is the total annual expense per unit under the pessimistic scenario? Ignore taxes.