Question 1

All else constant, the accounting break-even level of sales will decrease when the:

Accepted Answer

A)  Fixed costs increase. 
B)  Depreciation expense decreases. 
C)  Contribution margin decreases. 
D)  Variable costs per unit increase. 
E)  Selling price per unit decreases. 
A)  Fixed costs increase. 
B)  Depreciation expense decreases. 
C)  Contribution margin decreases. 
D)  Variable costs per unit increase. 
E)  Selling price per unit decreases.

Question 2

Which one of the following statements is correct about a project with an estimated internal rate of return of negative 100 percent?

Accepted Answer

A)  The net present value of the cash inﬂows is exactly equal to the initial investment in the project. 
B)  The estimated sales volume is equal to the cash break-even level of sales. 
C)  The estimated sales volume is equal to the ﬁnancial break-even level of sales. 
D)  The payback period is exactly equal to the life of the project. 
E)  The net present value of the project is equal to zero. 
A)  The net present value of the cash inﬂows is exactly equal to the initial investment in the project. 
B)  The estimated sales volume is equal to the cash break-even level of sales. 
C)  The estimated sales volume is equal to the ﬁnancial break-even level of sales. 
D)  The payback period is exactly equal to the life of the project. 
E)  The net present value of the project is equal to zero.

Question 3

When conducting a worst case scenario analysis, you should assume that:

Accepted Answer

A)  The sales quantity is at the upper end of your expectations. 
B)  The highest sales price obtainable in the marketplace can be charged. 
C)  No competition exists in the marketplace. 
D)  Your variable costs per unit are at the high end of the spectrum of possible prices. 
E)  Your ﬁxed costs are constant and at the low end of your cost range. 
A)  The sales quantity is at the upper end of your expectations. 
B)  The highest sales price obtainable in the marketplace can be charged. 
C)  No competition exists in the marketplace. 
D)  Your variable costs per unit are at the high end of the spectrum of possible prices. 
E)  Your ﬁxed costs are constant and at the low end of your cost range.

Question 4

Which one of the following most likely represents the greatest forecasting risk?

Accepted Answer

A)  The replacement of current machinery with similar equipment. 
B)  The reduction in production costs due to improved quality controls. 
C)  The introduction of a new product that expands the types of goods offered. 
D)  The introduction of an updated existing product. 
E)  The sale of a used piece of equipment that is no longer needed. 
A)  The replacement of current machinery with similar equipment. 
B)  The reduction in production costs due to improved quality controls. 
C)  The introduction of a new product that expands the types of goods offered. 
D)  The introduction of an updated existing product. 
E)  The sale of a used piece of equipment that is no longer needed.

Question 5

What is the contribution margin for a sensitivity analysis using a variable cost per unit of $12.50?

Accepted Answer

A)  $2.10 
B)  $2.40 
C)  $2.50 
D)  $2.75 
E)  $3.00 
A)  $2.10 
B)  $2.40 
C)  $2.50 
D)  $2.75 
E)  $3.00

Question 6

Thomas Industrial Products is considering offering a special one-time deal to its best customers. The company expects this offering to increase its total sales from 1,400 units to 1,550 units. The
Variable cost per unit is $134.31. The total ﬁxed cost is $125,000. If the company is willing to accept
The lowest possible price without losing money, it should charge a price equal to:

Accepted Answer

A)  $134.31 + ($125,000/1,550). 
B)  $134.31 + ($125,000/1,400). 
C)  $125,000/1,400. 
D)  $125,000/1,550. 
E)  $134.31. 
A)  $134.31 + ($125,000/1,550). 
B)  $134.31 + ($125,000/1,400). 
C)  $125,000/1,400. 
D)  $125,000/1,550. 
E)  $134.31.

Question 7

What is operating leverage and why is it important in the analysis of capital expenditure projects?

Accepted Answer

The text deﬁnes operating leverage as "t

Question 8

TD, Inc. is analyzing a new project. The data they have gathered to date is as follows:     What are the annual variable costs under the worst-case scenario?

Accepted Answer

A)  $115,236 
B)  $122,364 
C)  $128,040 
D)  $135,960 
E)  $149,556 
A)  $115,236 
B)  $122,364 
C)  $128,040 
D)  $135,960 
E)  $149,556

Question 9

Magellen Industries is analyzing a new project. The data they have gathered to date is as follows:   Initial requirement for equipment: $120,000 Depreciation: Straight-line to zero over the four-year life of the project with no salvage value.
Required rate of return: 15%
Marginal tax rate: 35%
What is the net present value under the best-case scenario?

Accepted Answer

A)  -$11,664 
B)  -$7,946 
C)  $7,946 
D)  $11,665 
E)  $37,946 
A)  -$11,664 
B)  -$7,946 
C)  $7,946 
D)  $11,665 
E)  $37,946

Question 10

BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per
Unit sold is $10. Fixed costs are $30,000 per year.
In addition to the BASIC INFORMATION, you expect the number of units sold to be 7,000 with an
Upper bound of 8,000 and a lower bound of 6,000, and you expect the variable cost per unit to be
$10 per unit with an upper bound of $12.50 and a lower bound of $7.50. Assuming a tax rate of
30%, compute the IRR for the BEST case. Note that salvage is $0, and NWC is $0.

Accepted Answer

A)  5% 
B)  12% 
C)  17% 
D)  34% 
E)  74% 
A)  5% 
B)  12% 
C)  17% 
D)  34% 
E)  74%

Question 11

A project that just breaks even on a cash basis must have a zero NPV.

Accepted Answer

A) True 
 B)False

Question 12

TD, Inc. is analyzing a new project. The data they have gathered to date is as follows:   What is the degree of operating leverage under the base-case scenario?

Accepted Answer

A)  .69 
B)  1.58 
C)  1.69 
D)  1.85 
E)  1.99 
A)  .69 
B)  1.58 
C)  1.69 
D)  1.85 
E)  1.99

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
Accounting 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

The greater the degree of sensitivity of any one variable, the:

Accepted Answer

A)  Less likely that variable is to cause potential losses if the estimated values are incorrect. 
B)  Higher the net present value will be with an increase in any of the variables. 
C)  Less slope the resulting net present value line will have when graphed against changes in that variable. 
D)  More attention management should pay to the reliability of the estimates for that variable. 
E)  Less important forecasting errors for that variable become. 
A)  Less likely that variable is to cause potential losses if the estimated values are incorrect. 
B)  Higher the net present value will be with an increase in any of the variables. 
C)  Less slope the resulting net present value line will have when graphed against changes in that variable. 
D)  More attention management should pay to the reliability of the estimates for that variable. 
E)  Less important forecasting errors for that variable become.

Question 15

A ﬁrm which is faced with hard rationing:

Accepted Answer

A)  Has more capital funds available than it has positive net present value projects and thus must decide what to do with the excess funds. 
B)  Allocates a ﬁxed amount of capital funds to each of its divisions on an annual basis. 
C)  Must decide how to allocate its limited capital funds among numerous positive net present value projects. 
D)  Must decide how to allocate its limited capital funds among various business units. 
E)  Has no capital funds available to ﬁnance a positive NPV project. 
A)  Has more capital funds available than it has positive net present value projects and thus must decide what to do with the excess funds. 
B)  Allocates a ﬁxed amount of capital funds to each of its divisions on an annual basis. 
C)  Must decide how to allocate its limited capital funds among numerous positive net present value projects. 
D)  Must decide how to allocate its limited capital funds among various business units. 
E)  Has no capital funds available to ﬁnance a positive NPV project.

Question 16

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.   Suppose you want to conduct a sensitivity analysis for the possible changes in unit sales. What is
The IRR when the sales level equals 3,250 units?

Accepted Answer

A)  32.6% 
B)  42.8% 
C)  57.9% 
D)  118.6% 
E)  121.5% 
A)  32.6% 
B)  42.8% 
C)  57.9% 
D)  118.6% 
E)  121.5%

Question 17

Fixed costs are generally affected by the amount of ﬁxed assets owned by a ﬁrm.

Accepted Answer

A) True 
 B)False

Question 18

BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per
Unit sold is $10. Fixed costs are $30,000 per year.
Using the BASIC INFORMATION only, if you expect to sell 7,000 units per year, what is the OCF in
Year 2 assuming a required return of 15% and a tax rate of 30%?

Accepted Answer

A)  $17,000 
B)  $20,000 
C)  $34,000 
D)  $48,000 
E)  $55,000 
A)  $17,000 
B)  $20,000 
C)  $34,000 
D)  $48,000 
E)  $55,000

Question 19

Which of the following does NOT correctly complete this sentence: A project that just breaks even in an accounting sense ___________________.

Accepted Answer

A)  Will lose money in a ﬁnancial sense. 
B)  Will result in zero taxes paid. 
C)  Will not contribute to net income for the ﬁrm. 
D)  Will have a payback period less than the life of the project. 
E)  Will have operating cash ﬂow equal to depreciation expense. 
A)  Will lose money in a ﬁnancial sense. 
B)  Will result in zero taxes paid. 
C)  Will not contribute to net income for the ﬁrm. 
D)  Will have a payback period less than the life of the project. 
E)  Will have operating cash ﬂow equal to depreciation expense.

Question 20

Provide a deﬁnition for the term variable costs.

Accepted Answer

Costs that change wh

Exam 11: Project Analysis and Evaluation

All else constant, the accounting break-even level of sales will decrease when the:

Which one of the following statements is correct about a project with an estimated internal rate of return of negative 100 percent?

When conducting a worst case scenario analysis, you should assume that:

Which one of the following most likely represents the greatest forecasting risk?

What is the contribution margin for a sensitivity analysis using a variable cost per unit of $12.50?

What is operating leverage and why is it important in the analysis of capital expenditure projects?

TD, Inc. is analyzing a new project. The data they have gathered to date is as follows: What are the annual variable costs under the worst-case scenario?

A project that just breaks even on a cash basis must have a zero NPV.

TD, Inc. is analyzing a new project. The data they have gathered to date is as follows: What is the degree of operating leverage under the base-case scenario?

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 Accounting break-even quantity?

The greater the degree of sensitivity of any one variable, the:

A ﬁrm which is faced with hard rationing:

Fixed costs are generally affected by the amount of ﬁxed assets owned by a ﬁrm.

Which of the following does NOT correctly complete this sentence: A project that just breaks even in an accounting sense ___________________.

Provide a deﬁnition for the term variable costs.

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