Exam 10: Project Analysis

The break-even level of sales represents the point where:

The capital budget "bottom up" perspective should be consistent with the firm's "top down" view through:

The purpose of sensitivity analysis is to show:

Market demand allowed Acme Corp.to raise its price by 20 percent to $60.What is the new level of break-even revenues if fixed charges including depreciation are $1 million and variable costs were 70 percent of the old price? (use the values in dollar)

A 4 year project is estimated to produce a product with the following information: selling price = $57 per unit; variable costs are $32 per unit; fixed costs are $9,000; required return is 12%; initial investment = $18,000.Calculate the financial break-even.

Which of the following offers the most plausible scenario for a firm that maintained a constant degree of operating leverage when its level of fixed costs doubled?

The difference between an NPV break-even level of sales and an accounting break-even level of sales is:

Which of the following statements is correct concerning sensitivity analysis?

A silver mine can yield 10,000 ounces of silver at a variable cost of $8 per ounce.The fixed costs of operating the mine are $10,000 per year.In half the years, silver can be sold for $12 per ounce; in the other years, silver can be sold for only $6 per ounce.Ignoring taxes, what is the average cash flow you will receive from the mine if it is always kept in operation and the silver is always sold in the year it is mined? What happens to the average cash flow from the mine if you can shut down the mine in years of low silver prices?

Capital rationing may be beneficial to a firm if it:

Which of the following statements is likely to be correct for a decision tree which indicates a 30 percent chance of making a $250,000 profit and a 70 percent chance of sustaining a $140,000 loss?

(Expansion Option) Now suppose that Hit or Miss Sports from the previous problem can expand production if the project is successful.By paying its workers overtime, it can increase production by 25,000 units; the variable cost of each ball will be higher, however, equal to $35 per unit.By how much does this option to expand production increase the NPV of the project?

Which of the following capital budgeting proposals is most likely to display a conflict of interests?

The NPV break-even level of sales will be higher than the accounting break-even level.

Barrier Corporation is performing a sensitivity analysis on one of its product.The product currently sells for $75 per unit, with variable cost of $46 per unit and fixed costs of $100,000.Barrier currently sells 80,000 units of this product.Barrier is considering reducing its price by 10%.If prices decrease, then it is expected that units sold will increase by 8%.Calculate the change in operating income.

A firm with high operating leverage is expected to:

What is the degree of operating leverage of this project?

How are sensitivity, scenario, and break-even analysis used to see the effect of an error in forecasts on project profitability? Why is an overestimate of sales more serious for projects with high operating leverage?

Which of the following is least likely to be responsible for a regional manager's conflict of interest in promoting a capital budgeting proposal?

(Abandonment Option) Hit or Miss Sports is introducing a new product this year.If its "see-at-night" soccer balls are a hit, the firm expects to be able to sell 50,000 units a year at a price of $60 each.If the new product is a bust, only 30,000 units can be sold at a price of $55.The variable cost of each ball is $30, and fixed costs are zero.The cost of the manufacturing equipment is $6 million, and the project life is estimated at 10 years.The firm will use straight-line depreciation over the 10-year life of the project.The firm's tax rate is 35 percent and the discount rate is 12 percent.