Exam 11: Project Analysis and Evaluation

Suppose that a project has a DOL = 0.75. If the quantity being produced increases from 96 to 100, what is the expected percentage change in operating cash flow?

Given the following information, what is the financial break-even point? Initial investment = $300,000; variable cost = $120; fixed cost = $65,000; price = $150; life = six years; required return = 10%; depreciation = $50,000; salvage value of assets = $25,000; initial net working capital Investment = $10,000. Ignore taxes.

A project with a high degree of operating leverage has an initial cash outlay that is generally relatively large in relation to the size of the project.

The Colby Brothers have been busy analyzing a new product. They have determined that an operating cash flow of $18,200 will result in a zero net present value, which is a company Requirement for project acceptance. The fixed costs are $11,650 and the contribution margin is $7)40. The company feels that they can realistically capture five percent of the 75,000 unit market For this product. Should the company develop the new product? Why or why not?

You have put together a set of cash flow forecasts for a project and have found, on your first calculation, that the NPV is positive. You should try to assess the degree of forecasting risk that exists with the project.

Blumberg Industries has just completed its analysis of a proposed project. The results show that if the project is accepted, the firm will lose an amount of money which is exactly equal to their initial Investment in the project. This means that:

When a firm has a high degree of operating leverage:

The accounting break-even point has an internal rate of return is zero.

A project that just breaks even on a financial basis will not pay back.

The Quick Producers Co. is analyzing a proposed project. The company expects to sell 10,000 units, give or take 5 percent. The expected variable cost per unit is $6 and the expected fixed cost Is $29,000. The fixed and variable cost estimates are considered accurate within a plus or minus 4 Percent range. The depreciation expense is $25,000. The tax rate is 34 percent. The sale price is Estimated at $13 a unit, give or take 6 percent. What is the net income under the best case scenario?

All else the same, if a firm revises its production process to use more labour and less machinery, the firm will have a decreased accounting break-even.

A firm that cannot raise funds in the financial markets in order to finance positive NPV projects is said to face soft capital rationing.

A project that has a payback period exactly equal to its life is a project that is operating at its:

The sales level that results in a project net present value exactly equal to zero is called:

The situation that exists when a firm has no means of financing its positive net present value projects is referred to as:

Sensitivity analysis is conducted by:

At the accounting break-even point, ______________.

The president of your firm would like to offer special sale prices to your best customers under the following terms: The prices will apply only to units purchased in excess of those normally purchased by the Customer. The units purchased must be paid for in cash at the time of sale. The total quantity sold under these terms cannot exceed the excess capacity of the firm. The net profit of the firm should not be affected either positively or negatively. Given these conditions, the special sale price should be set equal to the:

A project that just breaks even on a financial basis has a PI equal to zero.

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: