Question 1

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 2

The break-even level of sales represents the point where:

Accepted Answer

A) Fixed costs are covered 
B) Variable costs are covered 
C) Fixed costs and variable costs are covered 
D) Fixed costs, variable costs, and depreciation are covered 
A) Fixed costs are covered 
B) Variable costs are covered 
C) Fixed costs and variable costs are covered 
D) Fixed costs, variable costs, and depreciation are covered

Question 3

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 4

Operating leverage increases with fixed cost.

Accepted Answer

A) True 
 B)False

Question 5

A firm with high operating leverage is expected to:

Accepted Answer

A) Have high variable costs 
B) Have low fixed costs 
C) Have a high degree of profitability 
D) Perform better when sales are high 
A) Have high variable costs 
B) Have low fixed costs 
C) Have a high degree of profitability 
D) Perform better when sales are high

Question 6

The NPV break-even level of sales will be higher than the accounting break-even level.

Accepted Answer

A) True 
 B)False

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 $3 million x 25% = $750,000 annual reduction in cash flow
Change in NPV = $750,000 
A) $2,843,090 
B) $3,750,000 
C) $4,578,825 
D) $6,155,274 $3 million x 25% = $750,000 annual reduction in cash flow
Change in NPV = $750,000

Question 8

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 accounting 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 9

Sensitivity analysis takes into consideration the interrelationship of variables.

Accepted Answer

A) True 
 B)False

Question 10

The greater the ratio of variable costs to sales, the:

Accepted Answer

A) More each additional sale contributes to coverage of fixed costs 
B) Lower the level of profitability 
C) More units must be sold to cover fixed charges 
D) Lower the benefit of conducting a sensitivity analysis 
A) More each additional sale contributes to coverage of fixed costs 
B) Lower the level of profitability 
C) More units must be sold to cover fixed charges 
D) Lower the benefit of conducting a sensitivity analysis

Question 11

Decision trees display the possible outcomes associated with a series of related decisions.

Accepted Answer

A) True 
 B)False

Question 12

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 13

What are two of the factors that will commonly affect the abandonment value of a project? What criterion should determine abandonment?

Accepted Answer

Perhaps the largest factors affecting th

Question 14

The accounting break-even point for a firm is a function of its:

Accepted Answer

A) Net cash flows and depreciation expense 
B) Fixed costs and profit on each sale 
C) Variable costs and its tax liability 
D) Revenues and fixed costs 
A) Net cash flows and depreciation expense 
B) Fixed costs and profit on each sale 
C) Variable costs and its tax liability 
D) Revenues and fixed costs

Question 15

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Accepted Answer

A) It raises the break-even level 
B) It reduces the break-even level 
C) It has no effect on the break-even level 
D) This cannot be determined without knowing the length of the investment horizon 
A) It raises the break-even level 
B) It reduces the break-even level 
C) It has no effect on the break-even level 
D) This cannot be determined without knowing the length of the investment horizon

Question 16

Forecasting inconsistencies can be minimized by:

Accepted Answer

A) Allowing managers to establish their own forecasts 
B) Establishing a standardized economic forecast to be used year in, year out 
C) Generating current economic forecasts that are used throughout the firm 
D) Extending the current forecast into the future 
A) Allowing managers to establish their own forecasts 
B) Establishing a standardized economic forecast to be used year in, year out 
C) Generating current economic forecasts that are used throughout the firm 
D) Extending the current forecast into the future

Question 17

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70 percent variable costs?

Accepted Answer

A) An increase of $0.30. 
B) An increase of $1.00. 
C) An increase of $1.43. 
D) An increase of $3.33 Break-even level of revenue = 
A) An increase of $0.30. 
B) An increase of $1.00. 
C) An increase of $1.43. 
D) An increase of $3.33 Break-even level of revenue =

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

What is the maximum percentage of variable costs in relation to sales that a firm could experience and still break even with $5 million revenue, $1 million fixed costs, and $500,000 depreciation?

Accepted Answer

A) 30 percent 
B) 70 percent 
C) 80 percent 
D) 90 percent 
A) 30 percent 
B) 70 percent 
C) 80 percent 
D) 90 percent

Question 20

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 DOL = 1 +
= 1 +
= 1 + 3.56 
A) 3.56 
B) 3.67 
C) 4.56 
D) 4.67 DOL = 1 +
= 1 +
= 1 + 3.56

Exam 10: Project Analysis

The purpose of sensitivity analysis is to show:

The break-even level of sales represents the point where:

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.

Operating leverage increases with fixed cost.

A firm with high operating leverage is expected to:

The NPV break-even level of sales will be higher than the accounting break-even level.

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?

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 accounting break-even.

Sensitivity analysis takes into consideration the interrelationship of variables.

The greater the ratio of variable costs to sales, the:

Decision trees display the possible outcomes associated with a series of related decisions.

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

What are two of the factors that will commonly affect the abandonment value of a project? What criterion should determine abandonment?

The accounting break-even point for a firm is a function of its:

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Forecasting inconsistencies can be minimized by:

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70 percent variable costs?

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

What is the maximum percentage of variable costs in relation to sales that a firm could experience and still break even with $5 million revenue, $1 million fixed costs, and $500,000 depreciation?

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

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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