Question 1

Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using?

Accepted Answer

A)  Simulation testing 
B)  Sensitivity analysis 
C)  Break-even analysis 
D)  Rationing analysis 
E)  Scenario analysis

Question 2

A project has an accounting break-even quantity of 28,700 units, a cash break-even quantity of 17,120 units, a life of 10 years, fixed costs of $178,000, variable costs of $18.40 per unit, and a required return of 14 percent. Depreciation is straight-line to zero over the project life. Ignoring taxes, what is the financial break-even quantity?

Accepted Answer

A)  39,723 units 
B)  39,201 units 
C)  39,458 units 
D)  39,624 units 
E)  39,320 units

Question 3

Given the following, which feature identifies the most desirable level of output for a project?

Accepted Answer

A)  Operating cash flow equal to the depreciation expense 
B)  Payback period equal to the project's life 
C)  Discounted payback period equal to the project's life 
D)  Zero IRR 
E)  Zero operating cash flow

Question 4

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes.

Accepted Answer

A)  Sales price per unit 
B)  Management salaries 
C)  Variable labor costs per unit 
D)  Initial fixed asset purchases 
E)  Fixed costs

Question 5

Fixed costs:

Accepted Answer

A)  change as a small quantity of output produced changes. 
B)  are constant over the short-run regardless of the quantity of output produced. 
C)  are defined as the change in total costs when one more unit of output is produced. 
D)  are subtracted from sales to compute the contribution margin. 
E)  can be ignored in scenario analysis since they are constant over the life of a project.

Question 6

By definition, which one of the following must equal zero at the cash break-even point?

Accepted Answer

A)  Net present value 
B)  Internal rate of return 
C)  Contribution margin 
D)  Net income 
E)  Operating cash flow

Question 7

You have determined that an OCF of $151,406 will result in a zero net present value for a project, which is the minimum requirement for project acceptance. The fixed costs are $387,200 and the contribution margin per unit is $56.11. The company feels that it can realistically capture 8.5 percent of the 140,000 unit market for this product. The tax rate is 21 percent and the required rate of return is 13 percent. Should the company develop the new product? Why or why not?

Accepted Answer

A)  Yes; The project's required rate of return exceeds the expected IRR. 
B)  Yes; The expected level of sales exceeds the required level of production. 
C)  No; The required level of production exceeds the expected level of sales. 
D)  No; The contribution margin is too high. 
E)  No; The OCF is too low.

Question 8

A company is considering a project with a cash break-even point of 26,394 units. The selling price is $19 a unit, the variable cost per unit is $7, and depreciation is $89,800. What is the projected amount of fixed costs?

Accepted Answer

A)  $374,512 
B)  $316,728 
C)  $356,108 
D)  $288,512 
E)  $291,064

Question 9

Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently.

Accepted Answer

A)  Decrease the sales price 
B)  Increase the materials cost per unit 
C)  Decrease the labor hours per unit produced 
D)  Decrease the sales quantity 
E)  Increase the amount of the initial investment in net working capital

Question 10

Precise Machinery is analyzing a proposed project that is expected to have sales of 2,450 units, ±8 percent. The expected variable cost per unit is $246 and the expected fixed costs are $309,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $106,000. The sales price is estimated at $599 per unit, ±2 percent. What is the amount of the total costs per unit under the worst-case scenario?

Accepted Answer

A)  $448.58 
B)  $404.16 
C)  $366.67 
D)  $338.23 
E)  $394.58

Question 11

Your company is reviewing a project with estimated labor costs of $14.68 per unit, estimated raw material costs of $43.18 a unit, and estimated fixed costs of $18,000 a month. Sales are projected at 15,500 units, ±5 percent, over the one-year life of the project. Cost estimates are accurate within a range of ±3 percent. What are the total variable costs for the best-case scenario?

Accepted Answer

A)  $869,925 
B)  $861,560 
C)  $913,421 
D)  $951,960 
E)  $891,960

Question 12

New Town Instruments is analyzing a proposed project. The company expects to sell 1,600 units, ±3 percent. The expected variable cost per unit is $220 and the expected fixed costs are $438,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation expense is $64,000. The sales price is estimated at $647 per unit, ±2 percent. What is the sales revenue under the worst-case scenario?

Accepted Answer

A)  $1,086,825 
B)  $896,201 
C)  $984,061 
D)  $1,014,496 
E)  $932,017

Question 13

The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 3.3 percent, the operating cash flow increases by 4.6 percent. What is the degree of operating leverage if the contribution margin per unit is $47?

Accepted Answer

A)  .72 
B)  .85 
C)  1.75 
D)  1.18 
E)  1.39

Question 14

A project has an estimated sales price of $71 per unit, variable costs of $44.03 per unit, fixed costs of $57,000, a required return of 14 percent, an initial investment of $79,500, no salvage value, and a life of four years. Ignore taxes. What is the degree of operating leverage at the financial break-even level of output?

Accepted Answer

A)  2.72 
B)  3.09 
C)  2.53 
D)  3.03 
E)  1.48

Question 15

Wexford Industrial Supply is considering a new project with estimated depreciation of $38,200, fixed costs of $84,600, and total sales of $211,000 at the accounting break-even level. The variable costs per unit are estimated at $9.64. What is the accounting break-even level of production?

Accepted Answer

A)  6,871 units 
B)  9,333 units 
C)  10,415 units 
D)  9,149 units 
E)  7,248 units

Question 16

Cool Shades manufactures biotech sunglasses. The variable materials cost is $1.38 per unit, and the variable labor cost is $.92 per unit. Suppose the firm incurs fixed costs of $348,000 during a year in which total production is 136,000 units and the selling price is $19.50 per unit. What is the cash break-even point?

Accepted Answer

A)  16,453 units 
B)  22,435 units 
C)  20,233 units 
D)  18,907 units 
E)  14,768 units

Question 17

Assume a project has a sales quantity of 7,400 units, ±6 percent and a sales price of $59 a unit, ±1 percent. The expected variable cost per unit is $13, ±3 percent, and the expected fixed costs are $214,000, ±2 percent. The depreciation expense is $63,000 and the tax rate is 23 percent. What is the operating cash flow under the best-case scenario?

Accepted Answer

A)  $136,759 
B)  $118,470 
C)  $145,705 
D)  $134,208 
E)  $124,220

Question 18

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:

Accepted Answer

A)  financial deferral. 
B)  financial allocation. 
C)  capital allocation. 
D)  marginal rationing. 
E)  hard rationing.

Question 19

At an output level of 22,500 units, you calculate that the degree of operating leverage is 1.37. What will be the percentage change in operating cash flow if the new output level is 25,000 units?

Accepted Answer

A)  17.78 percent 
B)  16.17 percent 
C)  15.22 percent 
D)  17.73 percent 
E)  15.08 percent

Exam 11: Project Analysis and Evaluation