Exam 11: Project Analysis and Evaluation

Douglass Engineering is considering a project that has an initial cost today of $22,000. The project has a two-year life with cash inflows of $13,500 a year. Should the firm decide to wait one year to Commence this project, the initial cost will increase by 4 percent and the cash inflows will increase To $14,200 a year. What is the value of the option to wait if the applicable discount rate is 12 Percent?

Thompson & Son have been busy analyzing a new product. They have determined that an operating cash flow of $16,700 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $12,378 and the contribution margin is $6.20. The company feels that they can realistically capture 10 percent of the 50,000 unit market for this product. Should the company develop the new product? Why or why not?

Miller Brothers has determined that an operating cash flow of $24,300 will result in a zero net present value for a proposed project. The fixed costs of the project are $9,360 and the contribution margin is $4.30. The company feels that it will capture 18 percent of the 60,000 unit market for this product. Should the company develop the new product? Why or why not?

If the DOL = 1.05 and OCF rises from $10,000 to $12,500, the percentage change in sales = ?

The option to wait is defined as the situation where operations are shut down for a period of time.

Explain the basic characteristics of a project that occur at the financial break-even point.

The possibility that errors in projected cash flows can lead to incorrect NPV estimates is called:

Sensitivity analysis is the term used to describe the process of examining the effects on the net present value of a project when:

You are considering a new project. The project has projected annual depreciation of $11,600, total annual fixed costs of $29,001.50, and annual total sales of $46,900. The variable cost per unit is $5)70. What is the accounting break-even level of production?

An analysis of the relation between sales volume and various measures of profitability is called:

The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin.

Net income is equal to zero at the accounting break-even point.

If a project's base case NPV is positive, the project should automatically be accepted.

A project with a high degree of operating leverage has a high forecasting risk.

Which one of the following statements about costs is correct?

The accounting break-even production quantity for a project is 6,208 units. The fixed costs are $27,400 and the contribution margin is $5.20. What is the projected depreciation expense?

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

The Interstate Hotel is considering building a car wash at the edge of their property. Fixed costs are estimated at $62,000 a year. The variable cost per unit is estimated at $1.75. The estimated price Per car wash is $4.95. What is the cash break-even point of this project?

The net present value is equal to zero at the accounting break-even point.

The higher the contribution margin, the lower the cash break-even point.