Exam 11: Project Analysis and Evaluation

A project has an accounting break-even point of 41,400 units. The fixed costs are $198,634 and the depreciation expense is $21,200. The projected variable cost per unit is $41.50. What is the Projected sales price?

The possibility that errors in projected cash flows can lead to incorrect estimates of net present value is called _____ risk.

Consider the following statement by a business owner: "I never put together forecasts of the future. Why try to plan by guessing? I work better by reacting to what is happening rather than guessing about what will happen." Critique this statement.

Break-even analysis allows a firm to ask what-if type questions in capital budgeting.

What is the financial break-even point? Price = $100 per unit; variable cost = $24 per unit, fixed cost = $40,000 per year; depreciation = $10,000 per year. Assume a discount rate of 10%, project initial Outlay of $100,000, project life of 10 years, and ignore taxes.

What is the base case accounting break-even point?

All else equal, if you decrease your level of fixed costs, operating cash flow will also fall.

A project that just breaks even on a financial basis _______________.

A project that just breaks even on an accounting basis will not pay back.

The investment timing decision relates to:

A firm has fixed costs of $30,000 per year, depreciation of $10,000 per year, a price per unit of $50, and an accounting break-even point of 2,000 units. What is the firm's marginal cost at the Accounting break-even point?

Describe briefly each of the three methods of performing "What-If" analysis described in the text and explain the analyst's main goal in performing each.

A project requires an initial investment of $10,000, straight-line depreciable to zero over four years. The discount rate is 10%. Your tax bracket is 34% and you receive a tax credit for negative earnings In the year in which the loss occurs. Additional information for variables with forecast error are Shown below. What is the base case NPV for the project?

Projected sales is generally least subject to forecasting risk.

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 = 6 years; required return = 10%; depreciation = $50,000; salvage value of assets = $25,000. Ignore taxes.

If you want to determine the entire range of project outcomes that are reasonably likely to occur you should use _____ analysis.

You want to determine how changes in the price of a product affect a project's NPV and IRR. To best determine the impact, you would most likely use ____________.

Which one of the following statements concerning sensitivity analysis is correct?

Provide a definition for the term sensitivity analysis.

Conventional capital budgeting analysis will tend to understate the true NPV of a project if any of the following are present EXCEPT: