Question 1

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 2

What is the degree of operating leverage of this project?

Accepted Answer

DOL = 1 +

Question 3

The opportunity to abandon a project loses some of its value when:

Accepted Answer

A)  fixed costs are high. 
B)  markets are extremely competitive. 
C)  the future is relatively certain. 
D)  secondary markets exist and are active. 
A)  fixed costs are high. 
B)  markets are extremely competitive. 
C)  the future is relatively certain. 
D)  secondary markets exist and are active.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

In a graphic depiction of accounting break-even analysis,the larger the slope of the total cost line,the:

Accepted Answer

A)  higher the level of fixed costs. 
B)  higher the level of total revenue. 
C)  higher the number of units sold. 
D)  higher the percentage of variable costs. 
A)  higher the level of fixed costs. 
B)  higher the level of total revenue. 
C)  higher the number of units sold. 
D)  higher the percentage of variable costs.

Question 6

Firms that lack competitive advantages will:

Accepted Answer

A)  have difficulty finding positive NPV projects for investment. 
B)  be forced to capture larger market shares to be profitable. 
C)  avoid the need to conduct sensitivity analyses. 
D)  be forced to operate with a high degree of operating leverage. 
A)  have difficulty finding positive NPV projects for investment. 
B)  be forced to capture larger market shares to be profitable. 
C)  avoid the need to conduct sensitivity analyses. 
D)  be forced to operate with a high degree of operating leverage.

Question 7

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?

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 8

Which of the following would not be judged a traditional category of a capital budgeting project?

Accepted Answer

A)  machine replacement proposals 
B)  salary negotiations 
C)  new product proposals 
D)  plant expansion proposals 
A)  machine replacement proposals 
B)  salary negotiations 
C)  new product proposals 
D)  plant expansion proposals

Question 9

Sensitivity analysis evaluates projects by:

Accepted Answer

A)  forecasting changes in interest rates that would increase financing costs. 
B)  recording profitability changes while changing one variable at a time. 
C)  insuring that the project sponsor has proper incentives. 
D)  testing for interrelated variables. 
A)  forecasting changes in interest rates that would increase financing costs. 
B)  recording profitability changes while changing one variable at a time. 
C)  insuring that the project sponsor has proper incentives. 
D)  testing for interrelated variables.

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

What-if analysis is not crucial to capital budgeting.

Accepted Answer

A) True 
 B)False

Question 12

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?

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 13

The greater the DOL,the greater the protection against operating losses during economic downturns.

Accepted Answer

A) True 
 B)False

Question 14

If a decision tree indicates an expected NPV of $1 million,then:

Accepted Answer

A)  at least one of the outcomes had a negative NPV. 
B)  all of the outcomes had a positive NPV. 
C)  $1 million Is the firm's minimum guaranteed profit. 
D)  the project still contains uncertainty. 
A)  at least one of the outcomes had a negative NPV. 
B)  all of the outcomes had a positive NPV. 
C)  $1 million Is the firm's minimum guaranteed profit. 
D)  the project still contains uncertainty.

Question 15

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 16

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 17

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 18

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

Accepted Answer

A)  growth in sales. 
B)  strategic plans. 
C)  current level of funds. 
D)  dividend policy. 
A)  growth in sales. 
B)  strategic plans. 
C)  current level of funds. 
D)  dividend policy.

Question 19

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 20

(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?

Accepted Answer

The additional after-tax cash flow from

Exam 10: Project Analysis

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

What is the degree of operating leverage of this project?

The opportunity to abandon a project loses some of its value when:

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

In a graphic depiction of accounting break-even analysis,the larger the slope of the total cost line,the:

Firms that lack competitive advantages will:

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?

Which of the following would not be judged a traditional category of a capital budgeting project?

Sensitivity analysis evaluates projects by:

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.

What-if analysis is not crucial to capital budgeting.

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?

The greater the DOL,the greater the protection against operating losses during economic downturns.

If a decision tree indicates an expected NPV of $1 million,then:

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

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

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

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

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

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