Question 1

Harris Computer store has sales of $225,000, fixed costs of $40,000, and variable cost of $100,000.Calculate the degree of operating leverage (DOL) for this firm.

Accepted Answer

DOL = (225,000 - 100

Question 2

A project that simply breaks even on an accounting basis gives you your money back but does not cover the opportunity cost of the capital tied up in the project.

Accepted Answer

A) True 
 B)False

Question 3

Projects that can easily be modified in these ways are ____ valuable than those that don't provide such flexibility.

Accepted Answer

A) more 
B) less 
C) of equal 
D) indeterminant 
A) more 
B) less 
C) of equal 
D) indeterminant

Question 4

Describe decision trees, including how they can be useful and how they can be risky.

Accepted Answer

A decision tree is the diagram represent

Question 5

Which of the following appears to be the most suitable investment?

Accepted Answer

A) revenues cover fixed and variable costs. 
B) investment breaks even in an accounting sense. 
C) investment breaks even in an NPV sense. 
D) revenues exceed cost of goods sold. 
A) revenues cover fixed and variable costs. 
B) investment breaks even in an accounting sense. 
C) investment breaks even in an NPV sense. 
D) revenues exceed cost of goods sold.

Question 6

According to decision-tree analysis, investment projects should be discontinued when:

Accepted Answer

A) the probability of success is less than 50 percent. 
B) NPV is calculated to be negative. 
C) DOL increases from previous levels. 
D) the possibility of a failing outcome exists. 
A) the probability of success is less than 50 percent. 
B) NPV is calculated to be negative. 
C) DOL increases from previous levels. 
D) the possibility of a failing outcome exists.

Question 7

What happens to a firm with high operating leverage when the overall level of sales is very high?

Accepted Answer

A) the firm has higher levels of fixed costs. 
B) the firm will enjoy high profits. 
C) the firm will not break even in accounting terms. 
D) the firm will have a reduced level of fixed costs. 
A) the firm has higher levels of fixed costs. 
B) the firm will enjoy high profits. 
C) the firm will not break even in accounting terms. 
D) the firm will have a reduced level of fixed costs.

Question 8

Students, and managers alike, are continually reminded to avoid negative-NPV projects.Which of the following projects may be acceptable even at a loss?

Accepted Answer

A) a capacity expansion project 
B) a cost-reduction project 
C) a pollution-control project 
D) a machine replacement project 
A) a capacity expansion project 
B) a cost-reduction project 
C) a pollution-control project 
D) a machine replacement project

Question 9

Which of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

Accepted Answer

A) sales 
B) depreciation schedule 
C) labour cost 
D) food cost 
A) sales 
B) depreciation schedule 
C) labour cost 
D) food cost

Question 10

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 financial 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 11

Which of the following is not subtracted from sales revenues to determine pretax profit?

Accepted Answer

A) depreciation 
B) fixed costs 
C) interest expense 
D) variable costs 
A) depreciation 
B) fixed costs 
C) interest expense 
D) variable costs

Question 12

Ajax Corporation is performing a sensitivity analysis on one of its product.The product currently sells for $210 per unit, with variable cost of $90 per unit and fixed costs of $400,000.Ajax currently sells 12,000 units of this product.Ajax is considering raising its price by 15%.If prices increase, then it is expected that units sold will decrease by 10%.Calculate the change in operating income.

Accepted Answer

A) $196,200 decrease 
B) $248,500 decrease 
C) $196,200 increase 
D) $248,500 increase 
A) $196,200 decrease 
B) $248,500 decrease 
C) $196,200 increase 
D) $248,500 increase

Question 13

Which of the following appears to be a more likely result from using sensitivity analysis?

Accepted Answer

A) agreement on the appropriate discount rate. 
B) determine whether to finance with debt or equity. 
C) isolation of pivotal factor in project profitability. 
D) select the best capital budgeting project. 
A) agreement on the appropriate discount rate. 
B) determine whether to finance with debt or equity. 
C) isolation of pivotal factor in project profitability. 
D) select the best capital budgeting project.

Question 14

Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?

Accepted Answer

A) a decrease in the estimated annual sales. 
B) an increase in the discount rate. 
C) an increase in the initial investment. 
D) a decrease in the fixed costs. 
A) a decrease in the estimated annual sales. 
B) an increase in the discount rate. 
C) an increase in the initial investment. 
D) a decrease in the fixed costs.

Question 15

CumChan is undergoing a project that has fixed costs of $2,000 per year, depreciation charges of $1,000 a year of $12,000 a year, and variable costs equal to two-thirds of revenues.If sales increase by 5 percent, what will be the increase in pretax profits?

Accepted Answer

Revenue current is: $12000/(2/

Question 16

Which of the following descriptions is representative of scenario analysis?

Accepted Answer

A) one variable at a time is allowed to change. 
B) it isolates the unknowns that belong in the model. 
C) different combinations of variables are analyzed. 
D) it represents the "top-down" approach. 
A) one variable at a time is allowed to change. 
B) it isolates the unknowns that belong in the model. 
C) different combinations of variables are analyzed. 
D) it represents the "top-down" approach.

Question 17

If pretax profits decrease by 13.8 percent when the DOL is 3.8, then the decrease in sales is:

Accepted Answer

A) 0.28 percent. 
B) 2.75 percent. 
C) 3.63 percent. 
D) 10.00 percent. 
A) 0.28 percent. 
B) 2.75 percent. 
C) 3.63 percent. 
D) 10.00 percent.

Question 18

Operating leverage increases with fixed cost.

Accepted Answer

A) True 
 B)False

Question 19

What is the fixed-cost expenditure for a firm with a DOL of 4.5 that generates pretax profits of $1 million and has $600,000 in depreciation expense? (Enter the answer in millions)

Accepted Answer

A) $1.1 million 
B) $2.1 million 
C) $2.9 million 
D) $3.9 million 
A) $1.1 million 
B) $2.1 million 
C) $2.9 million 
D) $3.9 million

Question 20

Sensitivity analysis takes into consideration the interrelationship of variables.

Accepted Answer

A) True 
 B)False

Exam 10: Project Analysis

Harris Computer store has sales of $225,000, fixed costs of $40,000, and variable cost of $100,000.Calculate the degree of operating leverage (DOL) for this firm.

A project that simply breaks even on an accounting basis gives you your money back but does not cover the opportunity cost of the capital tied up in the project.

Projects that can easily be modified in these ways are ____ valuable than those that don't provide such flexibility.

Describe decision trees, including how they can be useful and how they can be risky.

Which of the following appears to be the most suitable investment?

According to decision-tree analysis, investment projects should be discontinued when:

What happens to a firm with high operating leverage when the overall level of sales is very high?

Students, and managers alike, are continually reminded to avoid negative-NPV projects.Which of the following projects may be acceptable even at a loss?

Which of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

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 financial break-even.

Which of the following is not subtracted from sales revenues to determine pretax profit?

Which of the following appears to be a more likely result from using sensitivity analysis?

Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?

CumChan is undergoing a project that has fixed costs of $2,000 per year, depreciation charges of $1,000 a year of $12,000 a year, and variable costs equal to two-thirds of revenues.If sales increase by 5 percent, what will be the increase in pretax profits?

Which of the following descriptions is representative of scenario analysis?

If pretax profits decrease by 13.8 percent when the DOL is 3.8, then the decrease in sales is:

Operating leverage increases with fixed cost.

What is the fixed-cost expenditure for a firm with a DOL of 4.5 that generates pretax profits of $1 million and has $600,000 in depreciation expense? (Enter the answer in millions)

Sensitivity analysis takes into consideration the interrelationship of 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

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Risk Management

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