Question 1

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Accepted Answer

A) it raises the break-even level. 
B) it reduces the break-even level. 
C) it has no effect on the break-even level. 
D) this cannot be determined without knowing the length of the investment horizon. 
A) it raises the break-even level. 
B) it reduces the break-even level. 
C) it has no effect on the break-even level. 
D) this cannot be determined without knowing the length of the investment horizon. C

Question 2

Recognizing that it may be in managers' best interests to be overly optimistic when proposing projects, how might firms effectively control this impulse?

Accepted Answer

A) employ capital rationing 
B) discontinue investment proposals 
C) fire managers after their first mistake 
D) fund all project proposals 
A) employ capital rationing 
B) discontinue investment proposals 
C) fire managers after their first mistake 
D) fund all project proposals A

Question 3

Firms that lack competitive advantages will:

Accepted Answer

A) have difficulty finding positive NPV projects for investment. 
B) be forced to capture larger market shares to be profitable. 
C) avoid the need to conduct sensitivity analyses. 
D) be forced to operate with a high degree of operating leverage. 
A) have difficulty finding positive NPV projects for investment. 
B) be forced to capture larger market shares to be profitable. 
C) avoid the need to conduct sensitivity analyses. 
D) be forced to operate with a high degree of operating leverage. A

Question 4

Although sensitivity analysis can provide managers with keen insights, there can be problems with the reliability of the NPV revisions.Discuss potential reasons for these problems, and how these problems might be confronted.

Accepted Answer

Sensitivity analysis sometimes picks arb

Question 5

The option to abandon a project becomes more valuable as the possible outcomes become more varied.

Accepted Answer

A) True 
 B)False

Question 6

Competitive advantage is an important element of many successful capital budgeting proposals.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following would not be judged a traditional category of a capital budgeting project?

Accepted Answer

A) machine replacement proposals 
B) salary negotiations 
C) new product proposals 
D) plant expansion proposals 
A) machine replacement proposals 
B) salary negotiations 
C) new product proposals 
D) plant expansion proposals

Question 8

A capital budget shows a proposed list of investments.

Accepted Answer

A) True 
 B)False

Question 9

Scenario analysis allows managers to look at different and sometimes inconsistent combinations of variables.

Accepted Answer

A) True 
 B)False

Question 10

Sensitivity analysis evaluates projects by:

Accepted Answer

A) forecasting changes in interest rates that would increase financing costs. 
B) recording profitability changes while changing one variable at a time. 
C) insuring that the project sponsor has proper incentives. 
D) testing for interrelated variables. 
A) forecasting changes in interest rates that would increase financing costs. 
B) recording profitability changes while changing one variable at a time. 
C) insuring that the project sponsor has proper incentives. 
D) testing for interrelated variables.

Question 11

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

Accepted Answer

A) True 
 B)False

Question 12

An 8 year project is estimated to produce a product with the following information: selling price = $80 per unit; variable costs are $65 per unit; fixed costs are $20,000; required return is 10%; initial investment = $200,000.Calculate the accounting break-even.

Accepted Answer

A) 3,000 
B) 3,833 
C) 4,000 
D) 4,833 
A) 3,000 
B) 3,833 
C) 4,000 
D) 4,833

Question 13

The option for a firm to expand future production has value because:

Accepted Answer

A) future production will be profitable. 
B) the option requires no investment today. 
C) the future holds uncertainty. 
D) today's production costs are lower than in the future. 
A) future production will be profitable. 
B) the option requires no investment today. 
C) the future holds uncertainty. 
D) today's production costs are lower than in the future.

Question 14

The greater the DOL, the greater the protection against operating losses during economic downturns.

Accepted Answer

A) True 
 B)False

Question 15

Define DOL, discuss what affects it and how to interpret it.

Accepted Answer

DOL is an acronym that stands for degree

Question 16

If a firm's DOL is 4.0 when its profit is $2,000,000 and its depreciation is $500,000, how much fixed cost does it have?

Accepted Answer

A) $5,000,000 
B) $5,500,000 
C) $6,000,000 
D) $7,500,000 
A) $5,000,000 
B) $5,500,000 
C) $6,000,000 
D) $7,500,000

Question 17

Modern Artifacts can produce keepsakes that will be sold for $80 each.Non depreciation fixed costs are $1,000 per year and variable costs are $60 per unit.If the project requires an initial investment of $3,000 and is expected to last for 5 years and the firm pays no taxes, what are the accounting and economic break-even levels of sales? The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 10 percent.

Accepted Answer

Variable cost = 75% of revenue
Therefore

Question 18

What-if analysis can help identify the inputs that are most worth refining before you commit to a project.

Accepted Answer

A) True 
 B)False

Question 19

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70 percent variable costs?

Accepted Answer

A) an increase of $0.30. 
B) an increase of $1.00. 
C) an increase of $1.43. 
D) an increase of $3.33 
A) an increase of $0.30. 
B) an increase of $1.00. 
C) an increase of $1.43. 
D) an increase of $3.33

Question 20

Why is managerial flexibility important in capital budgeting?

Accepted Answer

Some projects may take on added value be

Exam 10: Project Analysis

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Recognizing that it may be in managers' best interests to be overly optimistic when proposing projects, how might firms effectively control this impulse?

Firms that lack competitive advantages will:

Although sensitivity analysis can provide managers with keen insights, there can be problems with the reliability of the NPV revisions.Discuss potential reasons for these problems, and how these problems might be confronted.

The option to abandon a project becomes more valuable as the possible outcomes become more varied.

Competitive advantage is an important element of many successful capital budgeting proposals.

Which of the following would not be judged a traditional category of a capital budgeting project?

A capital budget shows a proposed list of investments.

Scenario analysis allows managers to look at different and sometimes inconsistent combinations of variables.

Sensitivity analysis evaluates projects by:

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

An 8 year project is estimated to produce a product with the following information: selling price = $80 per unit; variable costs are $65 per unit; fixed costs are $20,000; required return is 10%; initial investment = $200,000.Calculate the accounting break-even.

The option for a firm to expand future production has value because:

The greater the DOL, the greater the protection against operating losses during economic downturns.

Define DOL, discuss what affects it and how to interpret it.

If a firm's DOL is 4.0 when its profit is $2,000,000 and its depreciation is $500,000, how much fixed cost does it have?

What-if analysis can help identify the inputs that are most worth refining before you commit to a project.

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70 percent variable costs?

Why is managerial flexibility important in capital budgeting?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters