Question 1

Which of the following best describe the term ﬁxed costs.

Accepted Answer

A)  The percentage change in operating cash ﬂow relative to the percentage change in quantity sold. 
B)  The sales level that results in a zero NPV. 
C)  Costs that do not change when the quantity of output changes during a particular time period. 
D)  The possibility that errors in projected cash ﬂows lead to incorrect decisions. 
E)  Opportunities that managers can exploit if certain things happen in the future. 
A)  The percentage change in operating cash ﬂow relative to the percentage change in quantity sold. 
B)  The sales level that results in a zero NPV. 
C)  Costs that do not change when the quantity of output changes during a particular time period. 
D)  The possibility that errors in projected cash ﬂows lead to incorrect decisions. 
E)  Opportunities that managers can exploit if certain things happen in the future. C

Question 2

Provide a deﬁnition for the term contingency planning.

Accepted Answer

Taking into account the managerial options that are implicit in a project.

Question 3

A company is considering a project with a cash break-even point of 14,500 units. The selling price is $14 a unit and the variable cost per unit is $8. What is the projected amount of ﬁxed costs?

Accepted Answer

A)  $87,000 
B)  $94,000 
C)  $109,000 
D)  $116,000 
E)  $203,000 
A)  $87,000 
B)  $94,000 
C)  $109,000 
D)  $116,000 
E)  $203,000 A

Question 4

Choice Coffee has computed their ﬁxed costs to be $.20 for every cup of coffee they sell given an average daily sales level of 600 cups. They charge $1.65 per cup of coffee. The variable cost per
Cup is $.45. What is the contribution margin per cup of coffee sold?

Accepted Answer

A)  $.65 
B)  $.90 
C)  $1.00 
D)  $1.20 
E)  $1.65 
A)  $.65 
B)  $.90 
C)  $1.00 
D)  $1.20 
E)  $1.65

Question 5

The higher the contribution margin, the lower the accounting break-even point.

Accepted Answer

A) True 
 B)False

Question 6

The possibility that inaccurate estimates of future cash ﬂows will cause a project to incorrectly be accepted or rejected is known as:

Accepted Answer

A)  Sensitivity analysis. 
B)  Scenario analysis. 
C)  Forecasting risk. 
D)  A break-even error. 
E)  A marginal error. 
A)  Sensitivity analysis. 
B)  Scenario analysis. 
C)  Forecasting risk. 
D)  A break-even error. 
E)  A marginal error.

Question 7

Fixed costs change with the quantity of output produced.

Accepted Answer

A) True 
 B)False

Question 8

A project with a high degree of operating leverage is capital intensive.

Accepted Answer

A) True 
 B)False

Question 9

Which one of the following could lower the risk of a project by lowering the degree of operating leverage?

Accepted Answer

A)  You could hire temporary workers from an employment agency rather than hiring part-time employees. 
B)  You could use sub-contractors to produce sub-assemblies of your product rather than purchasing new equipment to do the work in-house. 
C)  You could lease equipment on a long-term basis rather than buying the equipment. 
D)  You could lower the projected selling price per unit. 
E)  You could change the production method to one which relies more on ﬁxed costs and less on variable costs than the current proposed method of production. 
A)  You could hire temporary workers from an employment agency rather than hiring part-time employees. 
B)  You could use sub-contractors to produce sub-assemblies of your product rather than purchasing new equipment to do the work in-house. 
C)  You could lease equipment on a long-term basis rather than buying the equipment. 
D)  You could lower the projected selling price per unit. 
E)  You could change the production method to one which relies more on ﬁxed costs and less on variable costs than the current proposed method of production.

Question 10

A project with IRR = -100% is operating at the __________ break-even point.

Accepted Answer

A)  Cash. 
B)  Accounting. 
C)  Financial. 
D)  Sales. 
E)  Leveraged. 
A)  Cash. 
B)  Accounting. 
C)  Financial. 
D)  Sales. 
E)  Leveraged.

Question 11

The Better Bilt Co. is fairly cautious when considering new projects and therefore analyzes each project using the most optimistic, the most realistic, and the most pessimistic value for each
Variable. The company is conducting:

Accepted Answer

A)  Forecasting research. 
B)  Sensitivity analysis. 
C)  Break-even analysis. 
D)  Scenario analysis. 
E)  Competitive analysis. 
A)  Forecasting research. 
B)  Sensitivity analysis. 
C)  Break-even analysis. 
D)  Scenario analysis. 
E)  Competitive analysis.

Question 12

The quantity sold at the accounting break-even point is equal to the total ﬁxed costs plus
depreciation divided by the contribution margin.

Accepted Answer

A) True 
 B)False

Question 13

A project has the following estimated data: price = $80 per unit; variable costs = $55 per unit; ﬁxed costs = $25,000; required return = 15%; initial investment = $44,000; life = ﬁve years. What is the
ﬁnancial break-even quantity?

Accepted Answer

A)  1,000 units. 
B)  1,352 units. 
C)  1,525 units 
D)  1,775 units 
E)  1,950 units 
A)  1,000 units. 
B)  1,352 units. 
C)  1,525 units 
D)  1,775 units 
E)  1,950 units

Question 14

A ﬁrm is reviewing a project that has ﬁxed costs of $123,500, variable costs of $189,700, sales of $427,600, and a 34% marginal tax rate. The project has no initial cash requirements. What is the
Degree of operating leverage for this project?

Accepted Answer

A)  .61 
B)  1.22 
C)  1.61 
D)  1.64 
E)  2.64 
A)  .61 
B)  1.22 
C)  1.61 
D)  1.64 
E)  2.64

Question 15

You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could:

Accepted Answer

A)  Lower the degree of operating leverage. 
B)  Lower the contribution margin. 
C)  Increase the initial cash outlay. 
D)  Increase the ﬁxed costs per unit while lowering the contribution margin. 
E)  Lower the operating cash ﬂow of the project. 
A)  Lower the degree of operating leverage. 
B)  Lower the contribution margin. 
C)  Increase the initial cash outlay. 
D)  Increase the ﬁxed costs per unit while lowering the contribution margin. 
E)  Lower the operating cash ﬂow of the project.

Question 16

A ﬁrm that faces capital rationing must select a subset of capital projects based on some ranking criterion. The capital budgeting technique best suited for this is the __________.

Accepted Answer

A)  NPV 
B)  IRR 
C)  PI 
D)  AAR 
E)  payback 
A)  NPV 
B)  IRR 
C)  PI 
D)  AAR 
E)  payback

Question 17

The Franklin Co. is analyzing a proposed project. The company expects to sell 3,500 units, give or take 15 percent. The expected variable cost per unit is $6 and the expected ﬁxed costs are
$15,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The
Depreciation expense is $6,000. The sales price is estimated at $21 a unit, give or take 3 percent.
The company bases their sensitivity analysis on the base case scenario
What is the sales revenue under the worst case scenario?

Accepted Answer

A)  $60,600.75 
B)  $62,474.00 
C)  $73,500.00 
D)  $84,525.00 
E)  $87,060.75 
A)  $60,600.75 
B)  $62,474.00 
C)  $73,500.00 
D)  $84,525.00 
E)  $87,060.75

Question 18

Which one of the following statements is correct?

Accepted Answer

A)  Having the ability to temporarily cease operations is referred to as the option to abandon. 
B)  Strategic options are relatively easy to evaluate using discounted cash ﬂow analysis. 
C)  Ignoring the option to expand causes the net present value of a project to be overestimated. 
D)  The option to abandon a project has no real ﬁnancial value. 
E)  Ignoring the option to abandon causes the net present value of a project to be underestimated. 
A)  Having the ability to temporarily cease operations is referred to as the option to abandon. 
B)  Strategic options are relatively easy to evaluate using discounted cash ﬂow analysis. 
C)  Ignoring the option to expand causes the net present value of a project to be overestimated. 
D)  The option to abandon a project has no real ﬁnancial value. 
E)  Ignoring the option to abandon causes the net present value of a project to be underestimated.

Question 19

Projected cash ﬂow is typically deﬁned to be:

Accepted Answer

A)  The best case expected cash ﬂow. 
B)  An average of the possible cash ﬂows from the various scenarios. 
C)  The largest possible cash ﬂow. 
D)  The cash ﬂow that results in the lowest NPV but still allows the project to be accepted. 
E)  The most likely cash ﬂow. 
A)  The best case expected cash ﬂow. 
B)  An average of the possible cash ﬂows from the various scenarios. 
C)  The largest possible cash ﬂow. 
D)  The cash ﬂow that results in the lowest NPV but still allows the project to be accepted. 
E)  The most likely cash ﬂow.

Question 20

Hard rationing is deﬁned as the situation that exists when a company:

Accepted Answer

A)  Has no projects with positive net present values. 
B)  Has more projects with positive net present values than it wishes to fund. 
C)  Cannot raise capital for new projects under any circumstances. 
D)  Allocates certain funds to each business unit for capital budgeting. 
E)  Has two mutually exclusive projects with the same internal rate of return. 
A)  Has no projects with positive net present values. 
B)  Has more projects with positive net present values than it wishes to fund. 
C)  Cannot raise capital for new projects under any circumstances. 
D)  Allocates certain funds to each business unit for capital budgeting. 
E)  Has two mutually exclusive projects with the same internal rate of return.

Exam 11: Project Analysis and Evaluation

Which of the following best describe the term ﬁxed costs.

Provide a deﬁnition for the term contingency planning.

A company is considering a project with a cash break-even point of 14,500 units. The selling price is $14 a unit and the variable cost per unit is $8. What is the projected amount of ﬁxed costs?

Choice Coffee has computed their ﬁxed costs to be $.20 for every cup of coffee they sell given an average daily sales level of 600 cups. They charge $1.65 per cup of coffee. The variable cost per Cup is $.45. What is the contribution margin per cup of coffee sold?

The higher the contribution margin, the lower the accounting break-even point.

The possibility that inaccurate estimates of future cash ﬂows will cause a project to incorrectly be accepted or rejected is known as:

Fixed costs change with the quantity of output produced.

A project with a high degree of operating leverage is capital intensive.

Which one of the following could lower the risk of a project by lowering the degree of operating leverage?

A project with IRR = -100% is operating at the __________ break-even point.

The Better Bilt Co. is fairly cautious when considering new projects and therefore analyzes each project using the most optimistic, the most realistic, and the most pessimistic value for each Variable. The company is conducting:

The quantity sold at the accounting break-even point is equal to the total ﬁxed costs plus depreciation divided by the contribution margin.

A project has the following estimated data: price = $80 per unit; variable costs = $55 per unit; ﬁxed costs = $25,000; required return = 15%; initial investment = $44,000; life = ﬁve years. What is the ﬁnancial break-even quantity?

A ﬁrm is reviewing a project that has ﬁxed costs of $123,500, variable costs of $189,700, sales of $427,600, and a 34% marginal tax rate. The project has no initial cash requirements. What is the Degree of operating leverage for this project?

You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could:

A ﬁrm that faces capital rationing must select a subset of capital projects based on some ranking criterion. The capital budgeting technique best suited for this is the __________.

Which one of the following statements is correct?

Projected cash ﬂow is typically deﬁned to be:

Hard rationing is deﬁned as the situation that exists when a company:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Filters