Question 1

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 2

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 3

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 accounting break-even.

Accepted Answer

A) 597 
B) 540 
C) 525 
D) 490 
A) 597 
B) 540 
C) 525 
D) 490

Question 4

Modern Artifacts can produce keepsakes that will be sold for $80 each.Non depreciation fixed costs are $1,000 per year and variable costs are $60 per unit.If the project requires an initial investment of $3,000 and is expected to last for 5 years and the firm pays no taxes, what are the accounting and economic break-even levels of sales? The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 10 percent.

Accepted Answer

Variable cost = 75% of revenue
Therefore

Question 5

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?

Accepted Answer

A) $1.1 million 
B) $2.1 million 
C) $2.9 million 
D) $3.9 million DOL = 1 +
4)5 = 1 +
3)5 =
$3)5 million = fixed costs + $600,000 
A) $1.1 million 
B) $2.1 million 
C) $2.9 million 
D) $3.9 million DOL = 1 +
4)5 = 1 +
3)5 =
$3)5 million = fixed costs + $600,000

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Calculate the NPV break-even level of sales for a project requiring an investment of $3,000,000 and providing as cash flows: .15 *sales less $250,000.Assume the project will generate these cash flows for 10 years and that the discount rate is 10 percent.

Accepted Answer

A) $3,254,890 
B) $3,504,890 
C) $4,921,549 
D) $19,686,667 PV cash flows = investment
6)14457(.15 sales - 250,000) = $3,000,000
)92169 sales - 1,536,142.50 = $3,000,000
)92169 sales = $4,536,142.50 
A) $3,254,890 
B) $3,504,890 
C) $4,921,549 
D) $19,686,667 PV cash flows = investment
6)14457(.15 sales - 250,000) = $3,000,000
)92169 sales - 1,536,142.50 = $3,000,000
)92169 sales = $4,536,142.50

Question 8

Confirm that the percentage change in profits equals DOL times the percentage change in sales.

Accepted Answer

Percent change in pr

Question 9

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 DOL = 1 +
4 = 1 +
3 = 
A) $5,000,000 
B) $5,500,000 
C) $6,000,000 
D) $7,500,000 DOL = 1 +
4 = 1 +
3 =

Question 10

Approximately how much was paid to invest in a project that has an NPV break-even level of sales of $5 million, cash flows determined by: .1 
*sales - $300,000, a six-year life, and an 8 percent discount rate?

Accepted Answer

A) $416,667 
B) $924,500 
C) $1,016,678 
D) $2,311,450 PV (cash flows) = investment 
A) $416,667 
B) $924,500 
C) $1,016,678 
D) $2,311,450 PV (cash flows) = investment

Question 11

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

One characteristic of scenario analysis is that:

Accepted Answer

A) It allows only one variable at a time to change 
B) It limits variation to only three of the more likely variable combinations 
C) All or nearly all variations are analyzed, regardless of likelihood 
D) Managers generate each variation by hand 
A) It allows only one variable at a time to change 
B) It limits variation to only three of the more likely variable combinations 
C) All or nearly all variations are analyzed, regardless of likelihood 
D) Managers generate each variation by hand

Question 14

When management selects production technologies that include a high proportion of fixed costs, they:

Accepted Answer

A) Decrease their DOL 
B) Increase their DOL 
C) Decrease their NPV break-even level of sales 
D) Reduce the NPV of their cash flows 
A) Decrease their DOL 
B) Increase their DOL 
C) Decrease their NPV break-even level of sales 
D) Reduce the NPV of their cash flows

Question 15

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 16

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 Break even = (600,00 + 100,000)/.2 
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 Break even = (600,00 + 100,000)/.2

Question 17

The option to abandon a project becomes more valuable as the possible outcomes become more varied.

Accepted Answer

A) True 
 B)False

Question 18

What-if analysis can help identify the inputs that are most worth refining before you commit to a project.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Exam 10: Project Analysis

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

Which of the following descriptions is representative of scenario analysis?

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 accounting break-even.

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?

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

Calculate the NPV break-even level of sales for a project requiring an investment of $3,000,000 and providing as cash flows: .15 *sales less $250,000.Assume the project will generate these cash flows for 10 years and that the discount rate is 10 percent.

Confirm that the percentage change in profits equals DOL times the percentage change in sales.

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?

Approximately how much was paid to invest in a project that has an NPV break-even level of sales of $5 million, cash flows determined by: .1 *sales - $300,000, a six-year life, and an 8 percent discount rate?

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

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

One characteristic of scenario analysis is that:

When management selects production technologies that include a high proportion of fixed costs, they:

Sensitivity analysis evaluates projects by:

The option to abandon a project becomes more valuable as the possible outcomes become more varied.

What-if analysis can help identify the inputs that are most worth refining before you commit to a project.

The opportunity to alter production technology gives managers:

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

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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