A) Are a constant percentage of sales revenues B) Vary with the level of depreciation expense C) Are constant with changes in the level of output D) Are inversely related to the level of output A) Are a constant percentage of sales revenues B) Vary with the level of depreciation expense C) Are constant with changes in the level of output D) Are inversely related to the level of output

Exam 10: Project Analysis

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?

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Question 1

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Good managers realize that the forecasts behind NPV calculations are imperfect.Therefore, they explore the consequences of a poor forecast and check whether it is worth doing some more homework.They use the following principal tools to answer these what-if questions:
- Sensitivity analysis, where one variable at a time is changed.
- Scenario analysis, where the manager looks at the project under alternative scenarios.
- Simulation analysis, an extension of scenario analysis in which a computer generates hundreds or thousands of possible combinations of variables.

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?

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Question 2

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

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Question 3

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Pretax profits currently equal
Revenue - variable costs - fixed costs - depreciation = $12000 - $8000 - $2000 - $1000 = $1,000
If sales increase by $600, expenses will increase by $400, and pretax profits will increase by $200, an increase of 20 percent.

Competitive advantage is an important element of many successful capital budgeting proposals.

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Question 4

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

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Question 5

Selecting the lowest cost technology:

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Question 6

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

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Question 7

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

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Question 8

Fixed costs:

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Question 9

Positive NPV projects most often occur because:

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Question 10

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?

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Question 11

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.

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Question 12

A silver mine can yield 10,000 ounces of silver at a variable cost of $8 per ounce.The fixed costs of operating the mine are $10,000 per year.In half the years, silver can be sold for $12 per ounce; in the other years, silver can be sold for only $6 per ounce.Ignoring taxes, what is the average cash flow you will receive from the mine if it is always kept in operation and the silver is always sold in the year it is mined? What happens to the average cash flow from the mine if you can shut down the mine in years of low silver prices?

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Question 13

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 Degree of operating leverage.

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Question 14

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.

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Question 15

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

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Question 16

Using a computer model to repeatedly vary the combination of project variables in order to compare NPVs is called:

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Question 17

What is the level of profits for a firm in which DOL = 5 and fixed costs including depreciation = $300,000?

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Question 18

If the project requires an initial investment of $6,000 and is expected to last for 5 years and the firm pays no taxes, what are the accounting and NPV break-even levels of sales? The initial investment will be depreciated straight-line over 10 years to a final value of zero, and the discount rate is 10 percent.

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Question 19

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 financial break-even.

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Question 20

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Exam 10: Project Analysis

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?

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?

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

Competitive advantage is an important element of many successful capital budgeting proposals.

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

Selecting the lowest cost technology:

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

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

Fixed costs:

Positive NPV projects most often occur because:

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?

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 Degree of operating leverage.

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.

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

Using a computer model to repeatedly vary the combination of project variables in order to compare NPVs is called:

What is the level of profits for a firm in which DOL = 5 and fixed costs including depreciation = $300,000?

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 financial break-even.

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

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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