Question 1

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 2

Conflicts of interest between shareholders and managers may result in the sacrifice of attractive capital budgeting proposals.

Accepted Answer

A) True 
 B)False

Question 3

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?

Accepted Answer

A)  $2,000,000 
B)  $2,400,000 
C)  $2,857,143 
D)  $3,333,333 
A)  $2,000,000 
B)  $2,400,000 
C)  $2,857,143 
D)  $3,333,333

Question 4

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 5

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 6

The purpose of sensitivity analysis is to show:

Accepted Answer

A)  the optimal level of the capital budget. 
B)  how price changes affect break-even volume. 
C)  seasonal variation in product demand. 
D)  how variables in a project affect profitability. 
A)  the optimal level of the capital budget. 
B)  how price changes affect break-even volume. 
C)  seasonal variation in product demand. 
D)  how variables in a project affect profitability.

Question 7

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?

Accepted Answer

Good managers realize that the forecasts

Question 8

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 9

Briefly describe several factors that increase the difficulty in selecting appropriate capital budgeting proposals.

Accepted Answer

Some of the more common problems in the

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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.

Question 12

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

Question 13

A capital budget shows a proposed list of investments.

Accepted Answer

A) True 
 B)False

Question 14

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?

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 15

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 16

If sales increase by 5 percent,what will be the increase in pretax profits?

Accepted Answer

Pretax profits currently equal
Revenue -

Question 17

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 18

How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million,fixed costs of $400,000,and a 60 percent ratio of variable costs to sales?

Accepted Answer

A)  $144,000 
B)  $266,667 
C)  $400,000 
D)  $666,667 
A)  $144,000 
B)  $266,667 
C)  $400,000 
D)  $666,667

Question 19

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

Accepted Answer

DOL is an acronym that stands for degree

Question 20

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

Exam 10: Project Analysis

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

Conflicts of interest between shareholders and managers may result in the sacrifice of attractive capital budgeting proposals.

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?

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

One of the problems inherent in sensitivity analysis is that:

The purpose of sensitivity analysis is to show:

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?

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

Briefly describe several factors that increase the difficulty in selecting appropriate capital budgeting proposals.

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

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

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

A capital budget shows a proposed list of investments.

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?

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?

If sales increase by 5 percent,what will be the increase in pretax profits?

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

How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million,fixed costs of $400,000,and a 60 percent ratio of variable costs to sales?

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

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

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 and Payout 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