Question 1

What percentage change in sales occurs if profits increase by 3 percent when the firm's degree of operating leverage is 4.5?

Accepted Answer

A) 0.33 percent 
B) 0.67 percent 
C) 1.5 percent 
D) 3.33 percent 
A) 0.33 percent 
B) 0.67 percent 
C) 1.5 percent 
D) 3.33 percent

Question 2

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 accounting break-even.

Accepted Answer

A) 597 
B) 540 
C) 525 
D) 490 
A) 597 
B) 540 
C) 525 
D) 490

Question 3

Positive NPV projects most often occur because:

Accepted Answer

A) analysts select sufficiently low discount rates. 
B) most projects are unique and innovative. 
C) cash-flow projections are extended into the future. 
D) of competitive advantages held by firms. 
A) analysts select sufficiently low discount rates. 
B) most projects are unique and innovative. 
C) cash-flow projections are extended into the future. 
D) of competitive advantages held by firms.

Question 4

Calculate the break-even level of sales, assuming: $1.4 million fixed costs, $400,000 depreciation expense, and variable costs-to-sales ratio of 65 percent.(use the values in dollar)

Accepted Answer

A) $2,769,231 
B) $2,857,143 
C) $4,000,000 
D) $5,142,857 
A) $2,769,231 
B) $2,857,143 
C) $4,000,000 
D) $5,142,857

Question 5

What happens to the NPV of a one-year project if fixed costs are increased from $400 to $600, the firm is profitable, has a 15 percent tax rate and employs a 12 percent cost of capital?

Accepted Answer

A) NPV decreases by $200.00 
B) NPV decreases by $173.91 
C) NPV decreases by $130.00 
D) NPV decreases by $151.79 
A) NPV decreases by $200.00 
B) NPV decreases by $173.91 
C) NPV decreases by $130.00 
D) NPV decreases by $151.79

Question 6

If a 20 percent reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

Accepted Answer

A) de-emphasizing that variable as a critical factor. 
B) requiring a more detailed sales forecast. 
C) the initial sales forecasts were inflated. 
D) a reallocation of fixed costs to this product. 
A) de-emphasizing that variable as a critical factor. 
B) requiring a more detailed sales forecast. 
C) the initial sales forecasts were inflated. 
D) a reallocation of fixed costs to this product.

Question 7

Decision trees display the possible outcomes associated with a series of related decisions.

Accepted Answer

A) True 
 B)False

Question 8

If forecasted sales exceed the break-even level but are less than the NPV break-even level, the project has a:

Accepted Answer

A) positive NPV but earns less than the discount rate. 
B) negative NPV but earns more than the discount rate. 
C) net loss on the income statement. 
D) net profit on the income statement. 
A) positive NPV but earns less than the discount rate. 
B) negative NPV but earns more than the discount rate. 
C) net loss on the income statement. 
D) net profit on the income statement.

Question 9

What level of management is responsible for originating capital budgeting proposals?

Accepted Answer

A) senior management 
B) divisional management 
C) lower management 
D) all levels of management 
A) senior management 
B) divisional management 
C) lower management 
D) all levels of management

Question 10

If sensitivity analysis indicates none of the individual variables will cause a negative NPV under pessimistic conditions, then the:

Accepted Answer

A) project is assured to be successful. 
B) project's discount rate should be reduced. 
C) economic forecasts are possibly overly optimistic. 
D) interaction of the variables should be considered. 
A) project is assured to be successful. 
B) project's discount rate should be reduced. 
C) economic forecasts are possibly overly optimistic. 
D) interaction of the variables should be considered.

Question 11

Scenario analysis allows managers to look at different but consistent combinations of interrelated variables.

Accepted Answer

A) True 
 B)False

Question 12

The degree of operating leverage shows the relationship between sales and pretax profits.

Accepted Answer

A) True 
 B)False

Question 13

If the level of sales is less than that calculated as the NPV break-even level, then the:

Accepted Answer

A) project will break even only in accounting terms. 
B) project's NPV will be greater than zero but less than the opportunity cost of capital. 
C) project will have a negative NPV. 
D) discount rate should be reduced. 
A) project will break even only in accounting terms. 
B) project's NPV will be greater than zero but less than the opportunity cost of capital. 
C) project will have a negative NPV. 
D) discount rate should be reduced.

Question 14

How much could NPV be affected by a worst-case scenario of 25 percent reduction from the $3 million in expected annual cash flows on a five-year project with 10 percent cost of capital? (use the values in dollar)

Accepted Answer

A) $2,843,090 
B) $3,750,000 
C) $4,578,825 
D) $6,155,274 
A) $2,843,090 
B) $3,750,000 
C) $4,578,825 
D) $6,155,274

Question 15

When the level of fixed costs is decreased, the break-even level of revenues:

Accepted Answer

A) will automatically decrease. 
B) will automatically increase. 
C) may or may not be changed, depending on variable costs. 
D) will remain unchanged, because fixed costs cannot be altered. 
A) will automatically decrease. 
B) will automatically increase. 
C) may or may not be changed, depending on variable costs. 
D) will remain unchanged, because fixed costs cannot be altered.

Question 16

When management selects production technologies that include a high proportion of fixed costs, they:

Accepted Answer

A) decrease their DOL. 
B) increase their DOL. 
C) decrease their NPV break-even level of sales. 
D) reduce the NPV of their cash flows. 
A) decrease their DOL. 
B) increase their DOL. 
C) decrease their NPV break-even level of sales. 
D) reduce the NPV of their cash flows.

Question 17

A firm with 60 percent of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation would show what accounting profit with sales of $3 million? Ignore taxes.(use the values in dollar)

Accepted Answer

A) Zero loss 
B) $370,000 loss 
C) $666,667 Loss 
D) $800,000 loss 
A) Zero loss 
B) $370,000 loss 
C) $666,667 Loss 
D) $800,000 loss

Question 18

The DOL measures the percentage change in ______, given a percentage change in _____.

Accepted Answer

A) fixed costs; sales 
B) profits; fixed costs 
C) profits, sales 
D) operating leverage; fixed costs 
A) fixed costs; sales 
B) profits; fixed costs 
C) profits, sales 
D) operating leverage; fixed costs

Question 19

A decision tree shows a 30 percent probability of $2 million in returns and a 70 percent chance of $1 million in returns.What is the maximum you would invest today in this project if the cash in-flow occurs one year in the future and the discount rate is 10 percent? (Use the values in dollar)

Accepted Answer

A) $818,182 
B) $1,181,818 
C) $1,300,000 
D) $1,363,636 
A) $818,182 
B) $1,181,818 
C) $1,300,000 
D) $1,363,636

Question 20

Which of the following techniques may be more appropriate to analyze projects with interrelated variables?

Accepted Answer

A) sensitivity analysis 
B) scenario analysis 
C) break-even analysis 
D) DOL analysis 
A) sensitivity analysis 
B) scenario analysis 
C) break-even analysis 
D) DOL analysis

Exam 10: Project Analysis

What percentage change in sales occurs if profits increase by 3 percent when the firm's degree of operating leverage is 4.5?

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 accounting break-even.

Positive NPV projects most often occur because:

Calculate the break-even level of sales, assuming: $1.4 million fixed costs, $400,000 depreciation expense, and variable costs-to-sales ratio of 65 percent.(use the values in dollar)

What happens to the NPV of a one-year project if fixed costs are increased from $400 to $600, the firm is profitable, has a 15 percent tax rate and employs a 12 percent cost of capital?

If a 20 percent reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

Decision trees display the possible outcomes associated with a series of related decisions.

If forecasted sales exceed the break-even level but are less than the NPV break-even level, the project has a:

What level of management is responsible for originating capital budgeting proposals?

If sensitivity analysis indicates none of the individual variables will cause a negative NPV under pessimistic conditions, then the:

Scenario analysis allows managers to look at different but consistent combinations of interrelated variables.

The degree of operating leverage shows the relationship between sales and pretax profits.

If the level of sales is less than that calculated as the NPV break-even level, then the:

How much could NPV be affected by a worst-case scenario of 25 percent reduction from the $3 million in expected annual cash flows on a five-year project with 10 percent cost of capital? (use the values in dollar)

When the level of fixed costs is decreased, the break-even level of revenues:

When management selects production technologies that include a high proportion of fixed costs, they:

A firm with 60 percent of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation would show what accounting profit with sales of $3 million? Ignore taxes.(use the values in dollar)

The DOL measures the percentage change in ______, given a percentage change in _____.

A decision tree shows a 30 percent probability of $2 million in returns and a 70 percent chance of $1 million in returns.What is the maximum you would invest today in this project if the cash in-flow occurs one year in the future and the discount rate is 10 percent? (Use the values in dollar)

Which of the following techniques may be more appropriate to analyze projects with interrelated variables?

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

The DOL measures the percentage change in __, given a percentage change in _.