Exam 11: Project Analysis and Evaluation

A group of investors planning to build a grocery store near the local mall spends $125,000 to buy the necessary land, put in the parking lot and lights for the parking lot. After completing these steps, they terminate the project when it is determined that another grocery store is being built right on the mall property. What option have the investors exercised? If, three years later the investors still own the land and its improvements (the parking lot) how should they value it if they are considering completing the grocery store as originally planned?

A project that just breaks even on a cash basis _________________.

Fixed costs are constant for a given period of time.

Which of the following best describe the term operating leverage.

If you see a worst case scenario for a project, the analyst is likely using ______________.

What is the operating cash flow for a sensitivity analysis using total fixed costs of $20,000?

All else equal, if you decrease your level of fixed costs, accounting break-even will also fall.

A firm has a DOL = 2.5. If sales decrease by 20%, then OCF will ____________.

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

Consider the following statement by a project analyst: "I analyzed my project using scenarios for the base case, best case, and worst case. I computed break-evens and degrees of operating leverage. I did sensitivity analysis and simulation analysis. I computed NPV, IRR, payback, AAR, and PI. In the end, I have over a hundred different estimates and am more confused than ever. I would have been better off just sticking with my first estimate and going by my gut reaction. Critique this statement.

As part of your project analysis, you also review various actions that management could take if a project encounters certain situations after it is implemented. This additional analysis is referred to As _____ planning.

Which of the following best describe the term marginal cost or incremental cost.

Webster and Words manage a product with a 3.5 degree of operating leverage. Sales of the product are expected to decline by 15 percent next year. What is the expected change in the Operating cash flow for this product for next year?

The degree to which a firm or project relies on fixed production costs is called its:

One industry with a high degree of operating leverage is the automobile manufacturing industry. Why does this industry have a high degree of operating leverage?

Explain the benefits of utilizing sensitivity analysis and justify why those benefits are important to the decision making process.

A project has the following estimated data: price = $150 per unit; variable costs = $88 per unit; fixed costs = $250,000; required return = 11%; initial investment = $200,000; $50,000 salvage value; life = Ten years. What is the accounting break-even quantity?

Which of the following best describe the term cash break-even.

Provide a definition for the term marginal cost or incremental cost.

A project has the following estimated data: price = $200 per unit; variable costs = $150 per unit; fixed costs = $400,000; required return = 9%; initial investment = $1,500,000; $200,000 salvage Value; life = 15 years. What is the degree of operating leverage at the financial break-even level of Output?