Question 1

Using this value, the earnings before interest and taxes will be:

Accepted Answer

A)  $20,000 
B)  $23,000 
C)  $28,000 
D)  $37,000 
E)  $40,000 
A)  $20,000 
B)  $23,000 
C)  $28,000 
D)  $37,000 
E)  $40,000

Question 2

A project has a seven-year life and an initial investment of $228,700 in equipment. The equipment will be depreciated straight-line to zero over seven years. Fixed costs are $124,600. Variable costs
Are $8.16 per unit. Sales are estimated at 54,500 units at an average price of $11.99. The estimated
Ranges of each variable are: sales quantity ±15%; sales price ± 2%; variable cost ± 10%; and ﬁxed
Costs ± 4%. The tax rate is 35%. Under the worst-case scenario, what is the operating cash ﬂow?

Accepted Answer

A)  -$54,602 
B)  -$21,931 
C)  -$12,878 
D)  $10,740 
E)  $22,549 
A)  -$54,602 
B)  -$21,931 
C)  -$12,878 
D)  $10,740 
E)  $22,549

Question 3

When ﬁrms do not have suﬃcient available ﬁnancing to invest in the positive NPV projects they have identiﬁed, __________________ is/are said to exist.

Accepted Answer

A)  Excess ﬁnancing. 
B)  Contingency options. 
C)  Strategic options. 
D)  Managerial options. 
E)  Capital rationing. 
A)  Excess ﬁnancing. 
B)  Contingency options. 
C)  Strategic options. 
D)  Managerial options. 
E)  Capital rationing.

Question 4

Your ﬁrm is considering a project with a ﬁve-year life and an initial cost of $260,000. The discount rate for the project is 14 percent. The ﬁrm expects to sell 3,600 units a year. The cash ﬂow per unit
Is $30. The ﬁrm will have the option to abandon this project after three years at which time they
Expect they could sell the project for $150,000. You are interested in knowing how the project will
Perform if the sales forecast for years four and ﬁve of the project are revised such that there is a
60/40 chance that the sales will be either 2,800 or 4,400 units a year, respectively. What is the net
Present value of this project given your sales forecasts?

Accepted Answer

A)  $96,141 
B)  $114,715 
C)  $132,708 
D)  $141,414 
E)  $155,556 
A)  $96,141 
B)  $114,715 
C)  $132,708 
D)  $141,414 
E)  $155,556

Question 5

Accounting break-even is deﬁned as the sales level that causes the project:

Accepted Answer

A)  Cash ﬂows to equal zero. 
B)  Discounted cash ﬂows to equal zero. 
C)  Net income to equal zero. 
D)  Cash inﬂows to equal the initial cash outﬂows. 
E)  Net income to equal the initial project expenditures. 
A)  Cash ﬂows to equal zero. 
B)  Discounted cash ﬂows to equal zero. 
C)  Net income to equal zero. 
D)  Cash inﬂows to equal the initial cash outﬂows. 
E)  Net income to equal the initial project expenditures.

Question 6

Opportunities that managers can exploit if certain events occur in the future are called:

Accepted Answer

A)  Tactical opportunities. 
B)  Strategic opportunities. 
C)  Managerial options. 
D)  Managerial scenarios. 
E)  Constrained capital budgeting analysis. 
A)  Tactical opportunities. 
B)  Strategic opportunities. 
C)  Managerial options. 
D)  Managerial scenarios. 
E)  Constrained capital budgeting analysis.

Question 7

A ﬁnancial manager reviewing a project is concerned about the level of forecasting risk in the project's estimated cash ﬂows. The manager should use ___________ to identify the variable that
Presents the highest degree of forecasting risk.

Accepted Answer

A)  Scenario analysis. 
B)  Simulation analysis. 
C)  Sensitivity analysis. 
D)  Break-even analysis. 
E)  Strategic options analysis. 
A)  Scenario analysis. 
B)  Simulation analysis. 
C)  Sensitivity analysis. 
D)  Break-even analysis. 
E)  Strategic options analysis.

Question 8

Fixed costs are equal to zero when production is zero.

Accepted Answer

A) True 
 B)False

Question 9

Given the following information, what is the degree of operating leverage? Price = $40 per unit; variable cost = $20 per unit; ﬁxed costs = $95,000 per year; depreciation = $35,000 per year; sales
= 10,000 units per year. Ignore tax effects.

Accepted Answer

A)  0.9 
B)  1.3 
C)  1.5 
D)  1.9 
E)  2.4 
A)  0.9 
B)  1.3 
C)  1.5 
D)  1.9 
E)  2.4

Question 10

A project with a low degree of operating leverage is capital intensive.

Accepted Answer

A) True 
 B)False

Question 11

A project that is operating at the point where the net present value is negative and equal to the initial cash outlay is operating at the _____ break-even level of sales.

Accepted Answer

A)  Accounting. 
B)  General. 
C)  Financial. 
D)  Cash. 
E)  Incremental. 
A)  Accounting. 
B)  General. 
C)  Financial. 
D)  Cash. 
E)  Incremental.

Question 12

Which of the following best describe the term forecasting risk.

Accepted Answer

A)  The percentage change in operating cash ﬂow relative to the percentage change in quantity sold. 
B)  The sales level that results in a zero NPV. 
C)  Costs that do not change when the quantity of output changes during a particular time period. 
D)  The possibility that errors in projected cash ﬂows lead to incorrect decisions. 
E)  Opportunities that managers can exploit if certain things happen in the future. 
A)  The percentage change in operating cash ﬂow relative to the percentage change in quantity sold. 
B)  The sales level that results in a zero NPV. 
C)  Costs that do not change when the quantity of output changes during a particular time period. 
D)  The possibility that errors in projected cash ﬂows lead to incorrect decisions. 
E)  Opportunities that managers can exploit if certain things happen in the future.

Question 13

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 contribution margin under the base case scenario?

Accepted Answer

A)  $14.55 
B)  $14.82 
C)  $15.00 
D)  $15.45 
E)  $15.63 
A)  $14.55 
B)  $14.82 
C)  $15.00 
D)  $15.45 
E)  $15.63

Question 14

Which of the following does NOT require ﬁnding the point where NPV = 0?

Accepted Answer

A)  Calculating IRR. 
B)  Setting a bid price. 
C)  Determining the point where a ﬁrm is indifferent between accepting or rejecting a project. 
D)  Finding the ﬁnancial break-even point. 
E)  Finding the EAC. 
A)  Calculating IRR. 
B)  Setting a bid price. 
C)  Determining the point where a ﬁrm is indifferent between accepting or rejecting a project. 
D)  Finding the ﬁnancial break-even point. 
E)  Finding the EAC.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

A project has a contribution margin of $5, projected ﬁxed costs of $12,000, projected variable cost per unit of $12, and a projected ﬁnancial break-even point of 5,000 units. What is the operating
Cash ﬂow at this level of output?

Accepted Answer

A)  $1,000 
B)  $12,000 
C)  $13,000 
D)  $68,000 
E)  $73,000 
A)  $1,000 
B)  $12,000 
C)  $13,000 
D)  $68,000 
E)  $73,000

Question 17

The difference between the unit sales price and the variable cost per unit is called:

Accepted Answer

A)  Operating leverage. 
B)  The contribution margin. 
C)  The gross proﬁt. 
D)  The net proﬁt. 
E)  The marginal revenue. 
A)  Operating leverage. 
B)  The contribution margin. 
C)  The gross proﬁt. 
D)  The net proﬁt. 
E)  The marginal revenue.

Question 18

The NPV computed using static DCF analysis is _________ if the project gives us the opportunity
to abandon the project if things go poorly; that is, it includes an option to abandon.

Accepted Answer

A)  Understated. 
B)  Overstated. 
C)  Accurately stated even. 
D)  Not conservative enough. 
E)  Useless. 
A)  Understated. 
B)  Overstated. 
C)  Accurately stated even. 
D)  Not conservative enough. 
E)  Useless.

Question 19

Provide a deﬁnition for the term forecasting risk.

Accepted Answer

The possibility that

Question 20

The higher the degree of operating leverage, the more the danger from forecasting risk.

Accepted Answer

A) True 
 B)False

Exam 11: Project Analysis and Evaluation

Using this value, the earnings before interest and taxes will be:

When ﬁrms do not have suﬃcient available ﬁnancing to invest in the positive NPV projects they have identiﬁed, __________________ is/are said to exist.

Accounting break-even is deﬁned as the sales level that causes the project:

Opportunities that managers can exploit if certain events occur in the future are called:

A ﬁnancial manager reviewing a project is concerned about the level of forecasting risk in the project's estimated cash ﬂows. The manager should use ___________ to identify the variable that Presents the highest degree of forecasting risk.

Fixed costs are equal to zero when production is zero.

Given the following information, what is the degree of operating leverage? Price = $40 per unit; variable cost = $20 per unit; ﬁxed costs = $95,000 per year; depreciation = $35,000 per year; sales = 10,000 units per year. Ignore tax effects.

A project with a low degree of operating leverage is capital intensive.

A project that is operating at the point where the net present value is negative and equal to the initial cash outlay is operating at the _____ break-even level of sales.

Which of the following best describe the term forecasting risk.

Which of the following does NOT require ﬁnding the point where NPV = 0?

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

A project has a contribution margin of $5, projected ﬁxed costs of $12,000, projected variable cost per unit of $12, and a projected ﬁnancial break-even point of 5,000 units. What is the operating Cash ﬂow at this level of output?

The difference between the unit sales price and the variable cost per unit is called:

The NPV computed using static DCF analysis is _________ if the project gives us the opportunity to abandon the project if things go poorly; that is, it includes an option to abandon.

Provide a deﬁnition for the term forecasting risk.

The higher the degree of operating leverage, the more the danger from forecasting risk.

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