Question 1

The level of sales at which project NPV is zero is referred to as the accounting break-even point.

Accepted Answer

A) True 
 B)False

Question 2

Beryl expects her sales to increase by 20 percent next year.If this year's sales are $500,000 and the degree of operating leverage (DOL) is 1.4, what is the expected level of operating income (EBIT) for next year if this year's EBIT is $100,000?

Accepted Answer

Next year's EBIT equals (this

Question 3

"What-if" questions ask what will happen to a project in various circumstances.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following sources would most likely be responsible for persistent "project cost over-runs"?

Accepted Answer

A) rapidly rising inflation 
B) delays in obtaining contracts and permits 
C) lack of raw materials 
D) forecasting bias by the sponsoring manager 
A) rapidly rising inflation 
B) delays in obtaining contracts and permits 
C) lack of raw materials 
D) forecasting bias by the sponsoring manager

Question 5

The strategic planning portion of the capital budgeting process is essentially a "bottom-up" process.

Accepted Answer

A) True 
 B)False

Question 6

What is the break-even level of revenues for a firm with $6 million in sales, variable costs of $3.9 million, fixed costs of $1.2 million, and depreciation of $1 million? (use the values in dollar)

Accepted Answer

A) $3,428,571 
B) $6,100,000 
C) $6,285,714 
D) $6,557,377 
A) $3,428,571 
B) $6,100,000 
C) $6,285,714 
D) $6,557,377

Question 7

For a firm with a DOL of 3.5, an increase in sales of 6 percent will:

Accepted Answer

A) increase pretax profits by 3.5 percent. 
B) decrease pretax profits by 3.5 percent. 
C) increase pretax profits by 21.0 percent. 
D) increase pretax profits by 1.71 percent. 
A) increase pretax profits by 3.5 percent. 
B) decrease pretax profits by 3.5 percent. 
C) increase pretax profits by 21.0 percent. 
D) increase pretax profits by 1.71 percent.

Question 8

What-if analysis is not crucial to capital budgeting.

Accepted Answer

A) True 
 B)False

Question 9

Calculate the ratio of variable-costs-to-sales for a firm with: $3,000,000 accounting break-even revenues, $1.2 million fixed costs, and $450,000 depreciation.(use the values in dollar)

Accepted Answer

A) 40 percent 
B) 45 percent 
C) 55 percent 
D) 60 percent 
A) 40 percent 
B) 45 percent 
C) 55 percent 
D) 60 percent

Question 10

A manufacturer contemplates a change in technology that would reduce fixed costs from $800,000 to $600,000, and reduce depreciation expense from $125,000 to $100,000.However, the ratio of variable costs to sales will increase from 68 percent to 80 percent.What will happen to break-even level of revenues?

Accepted Answer

A) a reduction to the level of $875,000 
B) a reduction to the level of $2,890,625 
C) an increase to the level of $3,500,000 
D) an increase to the level of $3,625,000 
A) a reduction to the level of $875,000 
B) a reduction to the level of $2,890,625 
C) an increase to the level of $3,500,000 
D) an increase to the level of $3,625,000

Question 11

A firm with $600,000 fixed costs and $200,000 depreciation is expected to produce $225,000 in profits.What is its DOL?

Accepted Answer

A) 3.56 
B) 3.67 
C) 4.56 
D) 4.67 
A) 3.56 
B) 3.67 
C) 4.56 
D) 4.67

Question 12

Break-even revenues on an accounting basis typically indicate a:

Accepted Answer

A) negative NPV for the firm. 
B) positive NPV for the firm. 
C) high degree of operating leverage. 
D) downturn in the business cycle. 
A) negative NPV for the firm. 
B) positive NPV for the firm. 
C) high degree of operating leverage. 
D) downturn in the business cycle.

Question 13

Describe the process of sensitivity analysis and list some of the common variables that you would expect to analyze.

Accepted Answer

Beginning from the initial forecast of p

Question 14

The opportunity to alter production technology gives managers:

Accepted Answer

A) the flexibility to adapt to changing situations. 
B) increased cash flow from operations. 
C) the opportunity to expand production. 
D) the ability to expand product lines. 
A) the flexibility to adapt to changing situations. 
B) increased cash flow from operations. 
C) the opportunity to expand production. 
D) the ability to expand product lines.

Question 15

The accounting break-even point is that level of sales where:

Accepted Answer

A) sales revenue equals variable costs. 
B) sales revenue equals variable plus fixed costs. 
C) EBIT equals depreciation expense, and, thus cash flow equals zero. 
D) EBIT equals zero. 
A) sales revenue equals variable costs. 
B) sales revenue equals variable plus fixed costs. 
C) EBIT equals depreciation expense, and, thus cash flow equals zero. 
D) EBIT equals zero.

Question 16

The break-even level of revenues represents the point at which the firm has:

Accepted Answer

A) Zero pretax profit. 
B) Zero net present value. 
C) Covered all opportunity costs. 
D) Covered all fixed and variable costs. 
A) Zero pretax profit. 
B) Zero net present value. 
C) Covered all opportunity costs. 
D) Covered all fixed and variable costs.

Question 17

How much does each additional sales dollar contribute toward profit for a firm with $5 million break-even level of revenues and $1.5 million in fixed costs including depreciation? (use the values in dollar)

Accepted Answer

A) $0.30 
B) $0.33 
C) $0.50 
D) $0.67 
A) $0.30 
B) $0.33 
C) $0.50 
D) $0.67

Question 18

One of the problems inherent in sensitivity analysis is that:

Accepted Answer

A) NPVs do not change once a project is introduced. 
B) most projects are equally sensitive to all variables. 
C) it can be difficult to define the range of outcomes. 
D) the cost of conducting the analysis is excessive. 
A) NPVs do not change once a project is introduced. 
B) most projects are equally sensitive to all variables. 
C) it can be difficult to define the range of outcomes. 
D) the cost of conducting the analysis is excessive.

Question 19

The opportunity to abandon a project inexpensively is likely to have more value when the product:

Accepted Answer

A) incurs high fixed costs of production. 
B) incurs high variable costs of production. 
C) is generating a positive NPV. 
D) has a steady degree of operating leverage. 
A) incurs high fixed costs of production. 
B) incurs high variable costs of production. 
C) is generating a positive NPV. 
D) has a steady degree of operating leverage.

Question 20

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then:

Accepted Answer

A) fixed costs should be traded for variable costs. 
B) variable costs should be traded for fixed costs. 
C) the project should not be undertaken. 
D) additional marketing analysis may be beneficial before proceeding. 
A) fixed costs should be traded for variable costs. 
B) variable costs should be traded for fixed costs. 
C) the project should not be undertaken. 
D) additional marketing analysis may be beneficial before proceeding.

Exam 10: Project Analysis

The level of sales at which project NPV is zero is referred to as the accounting break-even point.

Beryl expects her sales to increase by 20 percent next year.If this year's sales are $500,000 and the degree of operating leverage (DOL) is 1.4, what is the expected level of operating income (EBIT) for next year if this year's EBIT is $100,000?

"What-if" questions ask what will happen to a project in various circumstances.

Which of the following sources would most likely be responsible for persistent "project cost over-runs"?

The strategic planning portion of the capital budgeting process is essentially a "bottom-up" process.

What is the break-even level of revenues for a firm with $6 million in sales, variable costs of $3.9 million, fixed costs of $1.2 million, and depreciation of $1 million? (use the values in dollar)

For a firm with a DOL of 3.5, an increase in sales of 6 percent will:

What-if analysis is not crucial to capital budgeting.

Calculate the ratio of variable-costs-to-sales for a firm with: $3,000,000 accounting break-even revenues, $1.2 million fixed costs, and $450,000 depreciation.(use the values in dollar)

A firm with $600,000 fixed costs and $200,000 depreciation is expected to produce $225,000 in profits.What is its DOL?

Break-even revenues on an accounting basis typically indicate a:

Describe the process of sensitivity analysis and list some of the common variables that you would expect to analyze.

The opportunity to alter production technology gives managers:

The accounting break-even point is that level of sales where:

The break-even level of revenues represents the point at which the firm has:

How much does each additional sales dollar contribute toward profit for a firm with $5 million break-even level of revenues and $1.5 million in fixed costs including depreciation? (use the values in dollar)

One of the problems inherent in sensitivity analysis is that:

The opportunity to abandon a project inexpensively is likely to have more value when the product:

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then:

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