Question 1

Which of the following capital budgeting proposals is most likely to display a conflict of interests?

Accepted Answer

A) The proposal with the highest NPV 
B) The proposal with the longest payback period 
C) The proposal with highest IRR and quickest payback 
D) The proposal to solve pollution problems 
A) The proposal with the highest NPV 
B) The proposal with the longest payback period 
C) The proposal with highest IRR and quickest payback 
D) The proposal to solve pollution problems

Question 2

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 3

Although sensitivity analysis can provide managers with keen insights, there can be problems with the reliability of the NPV revisions.Discuss potential reasons for these problems, and how these problems might be confronted.

Accepted Answer

Sensitivity analysis sometimes picks arb

Question 4

Which of the following appears to be the most suitable investment?

Accepted Answer

A) Revenues cover fixed and variable costs 
B) Investment breaks even in an accounting sense 
C) Investment breaks even in an NPV sense 
D) Revenues exceed cost of goods sold 
A) Revenues cover fixed and variable costs 
B) Investment breaks even in an accounting sense 
C) Investment breaks even in an NPV sense 
D) Revenues exceed cost of goods sold

Question 5

Scenario analysis allows managers to look at different and sometimes inconsistent combinations of variables.

Accepted Answer

A) True 
 B)False

Question 6

(Abandonment Option) Hit or Miss Sports is introducing a new product this year.If its "see-at-night" soccer balls are a hit, the firm expects to be able to sell 50,000 units a year at a price of $60 each.If the new product is a bust, only 30,000 units can be sold at a price of $55.The variable cost of each ball is $30, and fixed costs are zero.The cost of the manufacturing equipment is $6 million, and the project life is estimated at 10 years.The firm will use straight-line depreciation over the 10-year life of the project.The firm's tax rate is 35 percent and the discount rate is 12 percent.
a.If each outcome is equally likely, what is expected NPV? Will the firm accept the project?
b.Suppose now that the firm can abandon the project and sell off the manufacturing equipment for $5.4 million if demand for the balls turns out to be weak.The firm will make the decision to continue or abandon after the first year of sales.Does the option to abandon change the firm's decision to accept the project?

Accepted Answer

Because of the aband

Question 7

Calculate the ratio of variable-costs-to-sales for a firm with: $3,000,000 accounting break-even revenues, $1.2 million fixed costs, and $450,000 depreciation.

Accepted Answer

A) 40 percent 
B) 45 percent 
C) 55 percent 
D) 60 percent Break even = 
A) 40 percent 
B) 45 percent 
C) 55 percent 
D) 60 percent Break even =

Question 8

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 9

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

Question 10

Students, and managers alike, are continually reminded to avoid negative-NPV projects.Which of the following projects may be acceptable even at a loss?

Accepted Answer

A) A capacity expansion project 
B) A cost-reduction project 
C) A pollution-control project 
D) A machine replacement project 
A) A capacity expansion project 
B) A cost-reduction project 
C) A pollution-control project 
D) A machine replacement project

Question 11

Which of the following statements is likely to be correct for a decision tree which indicates a 30 percent chance of making a $250,000 profit and a 70 percent chance of sustaining a $140,000 loss?

Accepted Answer

A) The decision should be "yes" whenever the amount of possible profit exceeds the amount of possible loss 
B) The decision should be "no" whenever there is a possibility of loss 
C) The expected value is positive before discounting 
D) The expected value is negative before discounting 
A) The decision should be "yes" whenever the amount of possible profit exceeds the amount of possible loss 
B) The decision should be "no" whenever there is a possibility of loss 
C) The expected value is positive before discounting 
D) The expected value is negative before discounting

Question 12

Which of the following is least likely to be responsible for a regional manager's conflict of interest in promoting a capital budgeting proposal?

Accepted Answer

A) Desire for professional advancement 
B) Thorough knowledge of the region 
C) Overly optimistic economic forecasts 
D) The need for quick profitability 
A) Desire for professional advancement 
B) Thorough knowledge of the region 
C) Overly optimistic economic forecasts 
D) The need for quick profitability

Question 13

Discuss the basic difference between an accounting break-even point analysis and an NPV break-even analysis.Which would you consider more reliable? Which would you consider more common? Why?

Accepted Answer

An accounting break-even analysis focuse

Question 14

What-if analysis is not crucial to capital budgeting.

Accepted Answer

A) True 
 B)False

Question 15

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 16

The inputs that are most worth refining before you commit to a project are the ones that have the greatest potential to alter project NPV.

Accepted Answer

A) True 
 B)False

Question 17

The DOL measures the percentage change in ______, given a percentage change in _____.

Accepted Answer

A) Fixed costs; sales 
B) Profits; fixed costs 
C) Profits, sales 
D) Operating leverage; fixed costs 
A) Fixed costs; sales 
B) Profits; fixed costs 
C) Profits, sales 
D) Operating leverage; fixed costs

Question 18

A capital budget shows a proposed list of investments.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Exam 10: Project Analysis

Which of the following capital budgeting proposals is most likely to display a conflict of interests?

One of the problems inherent in sensitivity analysis is that:

Although sensitivity analysis can provide managers with keen insights, there can be problems with the reliability of the NPV revisions.Discuss potential reasons for these problems, and how these problems might be confronted.

Which of the following appears to be the most suitable investment?

Scenario analysis allows managers to look at different and sometimes inconsistent combinations of variables.

Calculate the ratio of variable-costs-to-sales for a firm with: $3,000,000 accounting break-even revenues, $1.2 million fixed costs, and $450,000 depreciation.

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

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

Students, and managers alike, are continually reminded to avoid negative-NPV projects.Which of the following projects may be acceptable even at a loss?

Which of the following statements is likely to be correct for a decision tree which indicates a 30 percent chance of making a $250,000 profit and a 70 percent chance of sustaining a $140,000 loss?

Which of the following is least likely to be responsible for a regional manager's conflict of interest in promoting a capital budgeting proposal?

Discuss the basic difference between an accounting break-even point analysis and an NPV break-even analysis.Which would you consider more reliable? Which would you consider more common? Why?

What-if analysis is not crucial to capital budgeting.

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

The inputs that are most worth refining before you commit to a project are the ones that have the greatest potential to alter project NPV.

The DOL measures the percentage change in ______, given a percentage change in _____.

A capital budget shows a proposed list of investments.

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

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 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

Filters

The DOL measures the percentage change in __, given a percentage change in _.