Question 1

Given a constant sales price, the larger the contribution margin, the:

Accepted Answer

A)  Higher the variable cost per unit as a percentage of the sales price. 
B)  Higher the cash break-even point. 
C)  Lower the ﬁnancial break-even point. 
D)  Lower the ﬁxed costs as a percentage of the sales price. 
E)  Lower the gross proﬁt per unit sold. 
A)  Higher the variable cost per unit as a percentage of the sales price. 
B)  Higher the cash break-even point. 
C)  Lower the ﬁnancial break-even point. 
D)  Lower the ﬁxed costs as a percentage of the sales price. 
E)  Lower the gross proﬁt per unit sold.

Question 2

You are considering a project which has been assigned a discount rate of 14 percent. If you start the project today, you will incur an initial cost of $1,200 and will receive cash inﬂows of $600 a year for
Three years. If you wait one year to start the project, the initial cost will rise to $1,250 and the cash
ﬂows will increase to $645 a year for three years. What is the value of the option to wait?

Accepted Answer

A)  $10.16 
B)  $14.87 
C)  $19.00 
D)  $24.08 
E)  $27.03 
A)  $10.16 
B)  $14.87 
C)  $19.00 
D)  $24.08 
E)  $27.03

Question 3

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 amount of the ﬁxed cost per unit under the best case scenario?

Accepted Answer

A)  $3.47 
B)  $3.66 
C)  $3.85 
D)  $4.21 
E)  $4.43 
A)  $3.47 
B)  $3.66 
C)  $3.85 
D)  $4.21 
E)  $4.43

Question 4

Soft rationing, if it persists, is most likely bad for stockholders.

Accepted Answer

A) True 
 B)False

Question 5

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 ﬁnd that a salvage company will pay you $10,000 for
The assets at the end of year 3. The project will require an investment of $10,000 up front for net
Working capital. If you expect to sell 7,000 units per year, compute the NPV assuming a required
Return of 15% and a tax rate of 30%.

Accepted Answer

A)  Less than $0 
B)  $11,347 
C)  $14,416 
D)  $18,807 
E)  More than $20,000 
A)  Less than $0 
B)  $11,347 
C)  $14,416 
D)  $18,807 
E)  More than $20,000

Question 6

Variable costs can be forecast with a high degree of certainty beforehand.

Accepted Answer

A) True 
 B)False

Question 7

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
Cash 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 8

Variable costs minus ﬁxed costs equal marginal costs.

Accepted Answer

A) True 
 B)False

Question 9

Fixed costs __________________________.

Accepted Answer

A)  Change as a function of the quantity of output produced. 
B)  (For a given time period) are constant no matter the quantity of output produced. 
C)  Change as a function of the next unit of output produced. 
D)  Comprise the sum total of all production expenses of the ﬁrm for some time period. 
E)  comprise the sum total of all production expenses of the ﬁrm for some time period, expressed relative to the total output produced for that same time period. 
A)  Change as a function of the quantity of output produced. 
B)  (For a given time period) are constant no matter the quantity of output produced. 
C)  Change as a function of the next unit of output produced. 
D)  Comprise the sum total of all production expenses of the ﬁrm for some time period. 
E)  comprise the sum total of all production expenses of the ﬁrm for some time period, expressed relative to the total output produced for that same time period.

Question 10

The company conducts a sensitivity analysis using a variable cost of $8.90 per unit. The total variable costs given this estimate are:

Accepted Answer

A)  $33,820 
B)  $34,290 
C)  $35,600 
D)  $36,400 
E)  $37,180 
A)  $33,820 
B)  $34,290 
C)  $35,600 
D)  $36,400 
E)  $37,180

Question 11

Webster United is considering adding a new product to their lineup. The company expects to sell 15,000 units, give or take 3 percent, of this item. The expected variable cost per unit is $12 and the
Expected total ﬁxed cost is $21,000. The ﬁxed and variable cost estimates are considered accurate
Within a plus or minus 5 percent range. The depreciation expense is $22,000. The tax rate is 35
Percent. The sale price is estimated at $15 a unit, give or take 2 percent.
What is the net income under the worst case scenario?

Accepted Answer

A)  -$13,495 
B)  -$11,898 
C)  -$9,043 
D)  -$8,772 
E)  -$4,209 
A)  -$13,495 
B)  -$11,898 
C)  -$9,043 
D)  -$8,772 
E)  -$4,209

Question 12

Variable costs are equal to zero when production is zero.

Accepted Answer

A) True 
 B)False

Question 13

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. Ignore taxes.

Accepted Answer

A)  1,392 units 
B)  2,600 units 
C)  4,167 units 
D)  4,463 units 
E)  5,561 units 
A)  1,392 units 
B)  2,600 units 
C)  4,167 units 
D)  4,463 units 
E)  5,561 units

Question 14

To increase the contribution margin a ﬁrm must either _____ or _____.

Accepted Answer

A)  Increase its sales price; increase its ﬁxed cost per unit. 
B)  Increase its sales price; decrease its variable cost per unit. 
C)  Increase its sales price; decrease its ﬁxed cost per unit. 
D)  Increase its variable cost per unit; decrease its ﬁxed cost per unit. 
E)  Decrease its variable cost per unit; decrease its ﬁxed cost per unit. 
A)  Increase its sales price; increase its ﬁxed cost per unit. 
B)  Increase its sales price; decrease its variable cost per unit. 
C)  Increase its sales price; decrease its ﬁxed cost per unit. 
D)  Increase its variable cost per unit; decrease its ﬁxed cost per unit. 
E)  Decrease its variable cost per unit; decrease its ﬁxed cost per unit.

Question 15

A project has a four-year life and an initial cost of $84,000. This project has been assigned a 15% required rate of return. The selling price per unit has been set at $33.00. Annual ﬁxed costs are
$67,500 with variable costs of $28.90 per unit. What is the ﬁnancial break-even quantity if taxes are
Ignored?

Accepted Answer

A)  16,463 
B)  17,897 
C)  18,419 
D)  23,640 
E)  29,422 
A)  16,463 
B)  17,897 
C)  18,419 
D)  23,640 
E)  29,422

Question 16

Forecasting risk emphasizes the point that the soundness of any management decision based on the net present value of a proposed project is highly dependent upon the:

Accepted Answer

A)  Accuracy of the cash ﬂow projections used in the analysis. 
B)  The time frame in which the project is implemented. 
C)  Amount of the net present value in relation to the length of the project's life. 
D)  Level of capital spending in relation to the dollar amount of the net present value. 
E)  Frequency and duration of the project's cash ﬂows. 
A)  Accuracy of the cash ﬂow projections used in the analysis. 
B)  The time frame in which the project is implemented. 
C)  Amount of the net present value in relation to the length of the project's life. 
D)  Level of capital spending in relation to the dollar amount of the net present value. 
E)  Frequency and duration of the project's cash ﬂows.

Question 17

Which of the following is NOT a correct statement regarding break-even?

Accepted Answer

A)  Accounting break-even is the sales level that results in zero project net income. 
B)  The cash break-even is the sales level that results in zero OCF. 
C)  The ﬁnancial break-even is the sales level that results in zero NPV. 
D)  If there is depreciation the cash break-even will exceed the accounting break-even. 
E)  Of the three break-evens, the ﬁnancial break-even point is typically the highest. 
A)  Accounting break-even is the sales level that results in zero project net income. 
B)  The cash break-even is the sales level that results in zero OCF. 
C)  The ﬁnancial break-even is the sales level that results in zero NPV. 
D)  If there is depreciation the cash break-even will exceed the accounting break-even. 
E)  Of the three break-evens, the ﬁnancial break-even point is typically the highest.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Ralph is in charge of a project that has a degree of operating leverage of 2.5. What will happen to the operating cash ﬂows if Ralph increases the number of units sold by 5 percent?

Accepted Answer

A)  increase by 2 percent 
B)  increase by 12.5 percent 
C)  increase by 50 percent 
D)  decrease by 12.5 percent 
E)  decrease by 50 percent 
A)  increase by 2 percent 
B)  increase by 12.5 percent 
C)  increase by 50 percent 
D)  decrease by 12.5 percent 
E)  decrease by 50 percent

Question 20

The ﬁxed costs of a project are $16,000. The depreciation expense is $7,800 and the operating cash ﬂow is $12,700. What is the degree of operating leverage for this project?

Accepted Answer

A)  1.26 
B)  1.43 
C)  1.79 
D)  2.26 
E)  2.79 
A)  1.26 
B)  1.43 
C)  1.79 
D)  2.26 
E)  2.79

Exam 11: Project Analysis and Evaluation

Given a constant sales price, the larger the contribution margin, the:

Soft rationing, if it persists, is most likely bad for stockholders.

Variable costs can be forecast with a high degree of certainty beforehand.

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 Cash break-even quantity?

Variable costs minus ﬁxed costs equal marginal costs.

Fixed costs __________________________.

The company conducts a sensitivity analysis using a variable cost of $8.90 per unit. The total variable costs given this estimate are:

Variable costs are equal to zero when production is zero.

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. Ignore taxes.

To increase the contribution margin a ﬁrm must either _____ or _____.

Forecasting risk emphasizes the point that the soundness of any management decision based on the net present value of a proposed project is highly dependent upon the:

Which of the following is NOT a correct statement regarding break-even?

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

Ralph is in charge of a project that has a degree of operating leverage of 2.5. What will happen to the operating cash ﬂows if Ralph increases the number of units sold by 5 percent?

The ﬁxed costs of a project are $16,000. The depreciation expense is $7,800 and the operating cash ﬂow is $12,700. What is the degree of operating leverage for this project?

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

To increase the contribution margin a ﬁrm must either _ or _.