Question 1

If a 20 percent reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

Accepted Answer

A) De-emphasizing that variable as a critical factor 
B) Requiring a more detailed sales forecast 
C) The initial sales forecasts were inflated 
D) A reallocation of fixed costs to this product 
A) De-emphasizing that variable as a critical factor 
B) Requiring a more detailed sales forecast 
C) The initial sales forecasts were inflated 
D) A reallocation of fixed costs to this product

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

If pretax profits decrease by 13.8 percent when the DOL is 3.8, then the decrease in sales is:

Accepted Answer

A) 0.28 percent 
B) 2.75 percent 
C) 3.63 percent 
D) 10.00 percent DOL =
3)8 =
3)8X = -13.8%
X = 3.63% 
A) 0.28 percent 
B) 2.75 percent 
C) 3.63 percent 
D) 10.00 percent DOL =
3)8 =
3)8X = -13.8%
X = 3.63%

Question 4

While sensitivity analysis is forward-looking, scenario analysis attempts to reconstruct and analyze the past.

Accepted Answer

A) True 
 B)False

Question 5

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then:

Accepted Answer

A) Fixed costs should be traded for variable costs 
B) Variable costs should be traded for fixed costs 
C) The project should not be undertaken 
D) Additional marketing analysis may be beneficial before proceeding 
A) Fixed costs should be traded for variable costs 
B) Variable costs should be traded for fixed costs 
C) The project should not be undertaken 
D) Additional marketing analysis may be beneficial before proceeding

Question 6

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 7

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 NPV = - investment
0 = - investment 
A) $818,182 
B) $1,181,818 
C) $1,300,000 
D) $1,363,636 NPV = - investment
0 = - investment

Question 8

Briefly describe several factors that increase the difficulty in selecting appropriate capital budgeting proposals.

Accepted Answer

Some of the more common problems in the

Question 9

What is the NPV break-even for a project costing $4,000,000 and generating cash flows according to .30 *sales - $450,000? Assume the project will last 10 years and requires a discount rate of 12 percent.

Accepted Answer

A) $2,093,654 
B) $2,359,047 
C) $3,859,798 
D) $13,783,333 5.6502(.3 sales - 450,000) = 4,000,000
1)69506 sales - 2,542,590 = 4,000,000
1)69506 sales = 6,542,590 
A) $2,093,654 
B) $2,359,047 
C) $3,859,798 
D) $13,783,333 5.6502(.3 sales - 450,000) = 4,000,000
1)69506 sales - 2,542,590 = 4,000,000
1)69506 sales = 6,542,590

Question 10

Which of the following statements is correct concerning sensitivity analysis?

Accepted Answer

A) It ignores interrelationships between variables 
B) Several variables are allowed to change concurrently 
C) It considers all feasible variable combinations 
D) Its results are free from ambiguity 
A) It ignores interrelationships between variables 
B) Several variables are allowed to change concurrently 
C) It considers all feasible variable combinations 
D) Its results are free from ambiguity

Question 11

Fixed costs including depreciation have increased at Leverage, Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable-cost percentage be to leave break-even at $20 million?

Accepted Answer

A) 60 percent 
B) 65 percent 
C) 70 percent 
D) 75 percent Old: = $20 million
$\rightarrow$ Variable costs = 80%
New: = $20 million
X = 30% 
A) 60 percent 
B) 65 percent 
C) 70 percent 
D) 75 percent Old: = $20 million
$\rightarrow$ Variable costs = 80%
New: = $20 million
X = 30%

Question 12

According to decision-tree analysis, investment projects should be discontinued when:

Accepted Answer

A) The probability of success is less than 50 percent 
B) NPV is calculated to be negative 
C) DOL increases from previous levels 
D) The possibility of a failing outcome exists 
A) The probability of success is less than 50 percent 
B) NPV is calculated to be negative 
C) DOL increases from previous levels 
D) The possibility of a failing outcome exists

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 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 14

A video rental store will cost $650,000 to open.Assuming annual sales of $1 million, variable costs of 35 percent, fixed costs of $300,000, depreciation of $100,000, and a tax rate of 35 percent, calculate the NPV of the project over a 10-year horizon (no inflation or salvage value assumed) with a 12 percent cost of capital.Conduct a sensitivity analysis by allowing investment, sales, variable costs, and fixed costs to vary by plus/minus 10 percent from their original estimates.Which variable appears to affect profitability the most? What does the sensitivity analysis suggest the investor do?

Accepted Answer

NPV = $262,500 - $650,000
= 262,500 [8.3

Question 15

How much does each additional sales dollar contribute toward profit for a firm with $5 million break-even level of revenues and $1.5 million in fixed costs including depreciation?

Accepted Answer

A) $0.30 
B) $0.33 
C) $0.50 
D) $0.67 Break-even level of revenues = 
A) $0.30 
B) $0.33 
C) $0.50 
D) $0.67 Break-even level of revenues =

Question 16

How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million, fixed costs of $400,000, and a 60 percent ratio of variable costs to sales?

Accepted Answer

A) $144,000 
B) $266,667 
C) $400,000 
D) $666,667 $2,000,000 =
800,000 = 400,000 + Dep 
A) $144,000 
B) $266,667 
C) $400,000 
D) $666,667 $2,000,000 =
800,000 = 400,000 + Dep

Question 17

Define DOL, discuss what affects it and how to interpret it.

Accepted Answer

DOL is an acronym that stands for degree

Question 18

Soft capital rationing may be beneficial to a firm if it:

Accepted Answer

A) Reduces a firm's interest expense 
B) Weeds out proposals with weaker or biased NPVs 
C) Allows managers to select their favourite projects 
D) Increases funds to be used for other purposes 
A) Reduces a firm's interest expense 
B) Weeds out proposals with weaker or biased NPVs 
C) Allows managers to select their favourite projects 
D) Increases funds to be used for other purposes

Question 19

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 20

When the level of fixed costs is decreased, the break-even level of revenues:

Accepted Answer

A) Will automatically decrease 
B) Will automatically increase 
C) May or may not be changed, depending on variable costs 
D) Will remain unchanged, because fixed costs cannot be altered 
A) Will automatically decrease 
B) Will automatically increase 
C) May or may not be changed, depending on variable costs 
D) Will remain unchanged, because fixed costs cannot be altered

Exam 10: Project Analysis

If a 20 percent reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

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

If pretax profits decrease by 13.8 percent when the DOL is 3.8, then the decrease in sales is:

While sensitivity analysis is forward-looking, scenario analysis attempts to reconstruct and analyze the past.

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then:

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

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?

Briefly describe several factors that increase the difficulty in selecting appropriate capital budgeting proposals.

What is the NPV break-even for a project costing $4,000,000 and generating cash flows according to .30 *sales - $450,000? Assume the project will last 10 years and requires a discount rate of 12 percent.

Which of the following statements is correct concerning sensitivity analysis?

Fixed costs including depreciation have increased at Leverage, Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable-cost percentage be to leave break-even at $20 million?

According to decision-tree analysis, investment projects should be discontinued when:

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.

How much does each additional sales dollar contribute toward profit for a firm with $5 million break-even level of revenues and $1.5 million in fixed costs including depreciation?

How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million, fixed costs of $400,000, and a 60 percent ratio of variable costs to sales?

Define DOL, discuss what affects it and how to interpret it.

Soft capital rationing may be beneficial to a firm if it:

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

When the level of fixed costs is decreased, the break-even level of revenues:

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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