Question 1

Which type of analysis is most dependent upon the use of a computer?

Accepted Answer

A) Financial breakeven analysis 
B) Monte Carlo simulation 
C) Sensitivity analysis 
D) Accounting profit breakeven analysis 
E) Scenario analysis

Question 2

Isabelle is reviewing a project with projected sales of 1,500 units a year,a cash flow of $38 a unit,and a project life of 4 years.The initial cost of the project is $87,000.The relevant discount rate is 12 percent.She has the option to abandon the project after 1 year at which time she feels she could sell the project for $50,000.At what level of sales should she be willing to abandon the project?

Accepted Answer

A) 713 units 
B) 483 units 
C) 967 units 
D) 548 units 
E) 607 units

Question 3

ELK,Inc.has compiled this information for a proposed project: sales price = $89 ±3 percent; fixed costs = $21,800 ±1 percent; variable cost per unit = $42.90 ±3 percent; sales quantity = 1,500 units ±5 percent; tax rate = 34 percent; initial investment in fixed assets = $36,500; depreciation method = straight-line to a zero book value over the project's life; project life = 4 years; salvage value of fixed assets = $0; net working capital requirement = $4,800,which will be recouped at the end of the project; discount rate = 12 percent.What is the project's net present value for the pessimistic scenario?

Accepted Answer

A) $40,661.08 
B) $47,422.30 
C) $45,899.21 
D) $44,371.15 
E) $52,222.12

Question 4

Sensitivity analysis helps determine the

Accepted Answer

A) range of possible outcomes given possible ranges for each 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 situations. 
D) degree to which a firm is reliant upon multiple economic factors changing simultaneously. 
E) ideal level of variable costs in relation to the fixed costs of a project.

Question 5

The project defined by the following decision tree has a required discount rate of 14 percent.

What is the Time 1 net present value of a successful investment?

Accepted Answer

A) $89,406,415 
B) $92,305,012 
C) $87,342,087 
D) $122,008,054 
E) $126,583,344

Question 6

Which one of the following statements is correct regarding the financial breakeven point of a project?

Accepted Answer

A) The present value of the cash inflows exceeds the amount of the initial investment. 
B) The payback period of the project is equal to the life of the project. 
C) The operating cash flow is at a level that produces a net present value of zero. 
D) The project never pays back on a discounted basis. 
E) The IRR of the project exceeds the required rate of return.

Question 7

Monte Carlo simulation is based on assigning a ________ and analyzing the results.

Accepted Answer

A) single value to each of a project's variables 
B) wide range of values to multiple variables simultaneously 
C) wide range of values to a single variable 
D) narrow range of values to two variables simultaneously 
E) narrow range of values to a single variable

Question 8

The financial breakeven point determines which one of these values?

Accepted Answer

A) Total sales 
B) Sales price 
C) Variable cost per unit 
D) Fixed costs 
E) Sales quantity

Question 9

A proposed project has fixed costs of $159,800,depreciation expense of $47,920,and a sales quantity of 6,750 units.Ignore taxes.What is the contribution margin if the projected level of sales is the accounting breakeven point?

Accepted Answer

A) $33.29 
B) $30.77 
C) $27.18 
D) $34.36 
E) $32.00

Question 10

Sensitivity analysis of a project is conducted by

Accepted Answer

A) changing the value of a single variable and computing the resulting change in the net present value. 
B) changing the value of two project variables to determine their interdependency. 
C) holding all variables to their base level and changing the project's required rate of return. 
D) assigning either the best or the worst possible value to each variable and comparing the results to those of the expected case. 
E) comparing actual values to projected values to determine which variable had the greatest variation.

Question 11

Miller Tools is considering a new project that requires an initial investment of $81,300 for fixed assets,which will be depreciated straight-line to zero over the project's 3-year life.The project is expected to have fixed costs of $37,600 a year,and a contribution margin of $18.40.The tax rate is 34 percent and the discount rate is 15 percent.What is the financial breakeven point?

Accepted Answer

A) 2,950 units 
B) 4,217 units 
C) 2,200 units 
D) 2,483 units 
E) 3,667 units

Question 12

The Tall Stack expects to sell 3,000 units,±10 percent.The expected variable cost per unit is $7,±3 percent,and the expected fixed costs are $13,700,±1 percent.The depreciation expense is $6,870.The sale price is estimated at $16 a unit,±2 percent.The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $15.What will be the earnings before interest and taxes?

Accepted Answer

A) $6,430 
B) $10,300 
C) $4,300 
D) $3,430 
E) $13,130

Question 13

The accounting breakeven production quantity for a project is 7,209 units.The fixed costs are $34,780,and the contribution margin is $11.Assume a zero tax rate.What is the projected depreciation expense?

Accepted Answer

A) $43,600 
B) $45,050 
C) $44,519 
D) $47,053 
E) $47,143

Question 14

To make a project accept/reject decision using a decision tree

Accepted Answer

A) you start in the middle of the decision tree and work both forward and backward through the decision process. 
B) you start with the decisions that lie furthest into the future. 
C) you make the decisions in the top half of the tree prior to those in the bottom half. 
D) you begin with the decision at Time 0. 
E) you can make the decisions in any order of time.

Question 15

A project has earnings before interest and taxes of $7,318,fixed costs of $13,480,a selling price of $14 a unit,and a sales quantity of 7,500 units.Depreciation is $2,200.What is the variable cost per unit?

Accepted Answer

A) $10.56 
B) $12.08 
C) $8.87 
D) $10.93 
E) $11.24

Question 16

Which one of these occurs at the financial breakeven point?

Accepted Answer

A) Fixed costs equal variable costs 
B) EBIT equals zero 
C) Net income equals zero 
D) Net present value equals zero 
E) IRR equals zero

Question 17

A project requires an initial investment of $69,000 for equipment that will be depreciated using the straight-line method to zero over the project's 4-year life.The equipment can be sold for $15,000 at the end of the project.The project requires $8,700 in net working capital.The company expects to sell 31,000 units,±5 percent.The expected variable cost per unit is $12,and the expected fixed costs are $46,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $19 a unit,±2 percent.The discount rate is 14 percent,and the tax rate is 34 percent.What is the operating cash flow for a sensitivity analysis using total fixed costs of $45,000?

Accepted Answer

A) $124,520 
B) $116,520 
C) $122,000 
D) $119,385 
E) $132,033

Question 18

To set up a decision tree,you should

Accepted Answer

A) assign the most optimistic values to a success and the most pessimistic values to a failure. 
B) determine the cash flows that are most apt to occur given a set of circumstances. 
C) assign a constant discount rate to all decisions within the tree. 
D) ignore a project's initial cost. 
E) use equal probabilities for success and failure.

Question 19

If the option to abandon is ignored,the

Accepted Answer

A) initial cash flow of a project may be overstated. 
B) net present value of a project may be understated. 
C) net present value of a project will be stated at a time other than Time 0. 
D) net present value of a project will be overstated. 
E) initial cash flow of a project will be understated.

Question 20

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) contract. 
C) withdraw. 
D) abandon. 
E) expand.

Exam 9: Risk Analysis, Real Options, and Capital Budgeting