Question 1

If a large proportion of a firm's costs is fixed, a shortfall in sales will have a magnified effect on the firm's profits.

Accepted Answer

A) True 
 B)False  True

Question 2

Which one 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. C

Question 3

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

Accepted Answer

An accounting break-even analysis focuses on break-even in accounting terms, while the economic break-even adds in the opportunity cost of the investment. In other words, a break-even in accounting terms generally indicates a negative NPV for the project, until the opportunity cost of the initial investment can be recovered. Since financial managers must continually think of the opportunity costs of their projects, an economic break-even should be considered more reliable in selecting appropriate projects. It is likely the case, however, that accounting break-even is a more common exercise among managers. Although economic break-even should not be considered the most difficult of concepts, there are likely to be many management teams that confine their analysis to accounting terms.

Question 4

Income that is measured after the adjustment for the cost of capital is called:

Accepted Answer

A)  operating income. 
B)  operating profit. 
C)  accounting income. 
D) economic profit. 
A)  operating income. 
B)  operating profit. 
C)  accounting income. 
D) economic profit.

Question 5

A project has expected sales of 5,000 units, a selling price of $29 a unit, variable costs equal to 60% of sales, fixed costs of $32,000, and depreciation of $9,500. Assume that total revenue can increase by 12%, variable costs can decrease to 58% of sales, and fixed costs can decrease by 5% in an optimistic situation. What would the pretax profits be, per year, if the optimistic situation should occur? Show your computations.

Accepted Answer

The answer of A project has expected sales of 5,000...

Question 6

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% ratio of variable costs to sales?

Accepted Answer

A)  $144,000 
B)  $266,667 
C)  $400,000 
D) $666,667 
A)  $144,000 
B)  $266,667 
C)  $400,000 
D) $666,667

Question 7

If a firm's DOL is 3.6 with a profit of $2,000,000 and depreciation of $500,000, what are its fixed costs?

Accepted Answer

A)  $5,250,000 
B)  $4,700,000 
C)  $5,520,000 
D) $5,800,000 
A)  $5,250,000 
B)  $4,700,000 
C)  $5,520,000 
D) $5,800,000

Question 8

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

Accepted Answer

A)  increase pretax profits by 3.5%. 
B)  decrease pretax profits by 3.5%. 
C)  increase pretax profits by 21.0%. 
D) increase pretax profits by 1.71%. 
A)  increase pretax profits by 3.5%. 
B)  decrease pretax profits by 3.5%. 
C)  increase pretax profits by 21.0%. 
D) increase pretax profits by 1.71%.

Question 9

Which one of the following is most likely the reason why many projects fail to earn their projected rates of return?

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

Question 10

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 11

The level of sales that produces a zero project NPV is referred to as the accounting break-even point.

Accepted Answer

A) True 
 B)False

Question 12

The economic break-even point of a project can be found by:

Accepted Answer

A)  setting the discount rate equal to the DOL. 
B)  solving for the annual sales that will equate total revenue with total cost. 
C)  solving for the annual sales that will give the project an NPV of zero. 
D) solving for the level of sales that will give the project an IRR of zero. 
A)  setting the discount rate equal to the DOL. 
B)  solving for the annual sales that will equate total revenue with total cost. 
C)  solving for the annual sales that will give the project an NPV of zero. 
D) solving for the level of sales that will give the project an IRR of zero.

Question 13

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 would increase from 68% to 80%. What would be the change in the break-even level of revenues?

Accepted Answer

A)  Increase of $609,375 
B)  Increase of $574,750 
C)  Decrease of $211,250 
D) Decrease of $341,675 
A)  Increase of $609,375 
B)  Increase of $574,750 
C)  Decrease of $211,250 
D) Decrease of $341,675

Question 14

What happens to a firm with high operating leverage when the overall level of sales is very high?

Accepted Answer

A)  The firm will have higher levels of fixed costs. 
B)  The firm will enjoy high profits. 
C)  The firm will not break even in accounting terms. 
D) The firm will have a reduced level of depreciation. 
A)  The firm will have higher levels of fixed costs. 
B)  The firm will enjoy high profits. 
C)  The firm will not break even in accounting terms. 
D) The firm will have a reduced level of depreciation.

Question 15

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 16

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

Accepted Answer

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

Question 17

Which one of the following appears to be a more likely result from using sensitivity analysis?

Accepted Answer

A)  Agreement on the appropriate discount rate 
B)  Determination of whether to finance with debt or equity 
C)  Isolation of the pivotal factor in project profitability 
D) Selection of the best capital budgeting project 
A)  Agreement on the appropriate discount rate 
B)  Determination of whether to finance with debt or equity 
C)  Isolation of the pivotal factor in project profitability 
D) Selection of the best capital budgeting project

Question 18

Which one of the following capital budgeting proposals is most apt to be associated with 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 the highest IRR and quickest payback 
D) The proposal to solve pollution problems cited by the EPA 
A)  The proposal with the highest NPV 
B)  The proposal with the longest payback period 
C)  The proposal with the highest IRR and quickest payback 
D) The proposal to solve pollution problems cited by the EPA

Question 19

A decision tree indicates a 30% chance of making a $250,000 profit and a 70% chance of sustaining a $140,000 loss. Given this, the project should be:

Accepted Answer

A)  accepted because the amount of potential profit exceeds the amount of potential loss. 
B)  rejected because there is more than a 50% chance of loss. 
C)  accepted because the expected value is positive before discounting. 
D) rejected because the expected value is negative before discounting. 
A)  accepted because the amount of potential profit exceeds the amount of potential loss. 
B)  rejected because there is more than a 50% chance of loss. 
C)  accepted because the expected value is positive before discounting. 
D) rejected because the expected value is negative before discounting.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 10: Project Analysis

If a large proportion of a firm's costs is fixed, a shortfall in sales will have a magnified effect on the firm's profits.

Which one of the following descriptions is representative of scenario analysis?

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

Income that is measured after the adjustment for the cost of capital is called:

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% ratio of variable costs to sales?

If a firm's DOL is 3.6 with a profit of $2,000,000 and depreciation of $500,000, what are its fixed costs?

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

Which one of the following is most likely the reason why many projects fail to earn their projected rates of return?

A firm with high operating leverage is expected to:

The level of sales that produces a zero project NPV is referred to as the accounting break-even point.

The economic break-even point of a project can be found by:

What happens to a firm with high operating leverage when the overall level of sales is very high?

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 greater the ratio of variable costs to sales, the:

Which one of the following appears to be a more likely result from using sensitivity analysis?

Which one of the following capital budgeting proposals is most apt to be associated with a conflict of interests?

A decision tree indicates a 30% chance of making a $250,000 profit and a 70% chance of sustaining a $140,000 loss. Given this, the project should be:

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

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

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

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