Question 1

A firm with $600,000 of fixed costs and $200,000 of 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 
A)  3.56 
B)  3.67 
C)  4.56 
D) 4.67

Question 2

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 3

Which one of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

Accepted Answer

A)  Sales 
B)  Depreciation 
C)  Labor cost 
D) Food cost 
A)  Sales 
B)  Depreciation 
C)  Labor cost 
D) Food cost

Question 4

A project has expected sales of 6,000 units, a selling price of $54 a unit, variable costs equal to 62% of sales, fixed costs of $72,000, and depreciation of $13,500. Assume that total revenues and fixed costs change by 5% in a pessimistic situation. What would the pretax profits be, per year, if the pessimistic situation should occur? Show your computations.

Accepted Answer

The answer of A project has expected sales of 6,000...

Question 5

One characteristic of simulation analysis is that:

Accepted Answer

A)  it allows only one variable at a time to change. 
B)  it limits variation to only a few more likely combinations. 
C)  many variations are analyzed regardless of their likelihood of occurrence. 
D) it identifies the variable that has the greatest effect on a project's value. 
A)  it allows only one variable at a time to change. 
B)  it limits variation to only a few more likely combinations. 
C)  many variations are analyzed regardless of their likelihood of occurrence. 
D) it identifies the variable that has the greatest effect on a project's value.

Question 6

Positive NPV projects exist because:

Accepted Answer

A)  analysts select high discount rates. 
B)  most projects are unique and innovative. 
C)  cash-flow projections are extended into the future. 
D) firms hold competitive advantages. 
A)  analysts select high discount rates. 
B)  most projects are unique and innovative. 
C)  cash-flow projections are extended into the future. 
D) firms hold competitive advantages.

Question 7

Fixed costs:

Accepted Answer

A)  are a constant percentage of sales revenues. 
B)  vary with the level of depreciation expense. 
C)  are constant over a given range of output. 
D) are inversely related to the level of output. 
A)  are a constant percentage of sales revenues. 
B)  vary with the level of depreciation expense. 
C)  are constant over a given range of output. 
D) are inversely related to the level of output.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Using a computer model to repeatedly vary the combination of project variables in order to compare vast numbers of potential NPVs is called:

Accepted Answer

A)  scenario analysis. 
B)  sensitivity analysis. 
C)  NPV break-even analysis. 
D) simulation analysis. 
A)  scenario analysis. 
B)  sensitivity analysis. 
C)  NPV break-even analysis. 
D) simulation analysis.

Question 10

What percentage change in sales occurs if profits increase by 3% when the firm's degree of operating leverage is 4.5?

Accepted Answer

A)  0.33% 
B)  0.67% 
C)  3.03% 
D) 1.50% 
A)  0.33% 
B)  0.67% 
C)  3.03% 
D) 1.50%

Question 11

Calculate the accounting break-even level of sales assuming $865,000 of fixed costs, $400,000 depreciation expense, and a variable costs-to-sales ratio of 65%.

Accepted Answer

A)  $2,769,230.77 
B)  $3,614,285.71 
C)  $4,237,769.23 
D) $1,946.153.85 
A)  $2,769,230.77 
B)  $3,614,285.71 
C)  $4,237,769.23 
D) $1,946.153.85

Question 12

Which one 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 13

The clothing industry is considered to have a high degree of operating leverage.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

Sensitivity analysis sometimes picks arb

Question 15

A project that adds zero economic value:

Accepted Answer

A)  has a positive NPV. 
B)  has an NPV of zero. 
C)  has a negative NPV. 
D) is at the accounting break-even point. 
A)  has a positive NPV. 
B)  has an NPV of zero. 
C)  has a negative NPV. 
D) is at the accounting break-even point.

Question 16

Break-even revenues on an accounting basis typically indicate a:

Accepted Answer

A)  negative NPV for the firm. 
B)  positive NPV for the firm. 
C)  high degree of operating leverage. 
D) downturn in the business cycle. 
A)  negative NPV for the firm. 
B)  positive NPV for the firm. 
C)  high degree of operating leverage. 
D) downturn in the business cycle.

Question 17

The option to abandon a project inexpensively is likely to have more value when the project:

Accepted Answer

A)  incurs high fixed costs of production. 
B)  incurs high variable costs of production. 
C)  generates a positive NPV. 
D) has a low degree of operating leverage. 
A)  incurs high fixed costs of production. 
B)  incurs high variable costs of production. 
C)  generates a positive NPV. 
D) has a low degree of operating leverage.

Question 18

A project with which one of these sets of values would you be most apt to reject?

Accepted Answer

A)  High operating leverage, sales projected at the accounting break-even level, and no option to abandon 
B)  High operating leverage, sales projected at the economic break-even level, and an option to abandon 
C)  Low operating leverage, sales projected at the accounting break-even level, and an option to abandon 
D) Low operating leverage, sales projected at the economic break-even level, and an option to expand 
A)  High operating leverage, sales projected at the accounting break-even level, and no option to abandon 
B)  High operating leverage, sales projected at the economic break-even level, and an option to abandon 
C)  Low operating leverage, sales projected at the accounting break-even level, and an option to abandon 
D) Low operating leverage, sales projected at the economic break-even level, and an option to expand

Question 19

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 
A)  $1.1 million 
B)  $2.1 million 
C)  $2.9 million 
D) $3.9 million

Question 20

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

Exam 10: Project Analysis

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

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

Which one of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

One characteristic of simulation analysis is that:

Positive NPV projects exist because:

Fixed costs:

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

Using a computer model to repeatedly vary the combination of project variables in order to compare vast numbers of potential NPVs is called:

What percentage change in sales occurs if profits increase by 3% when the firm's degree of operating leverage is 4.5?

Calculate the accounting break-even level of sales assuming $865,000 of fixed costs, $400,000 depreciation expense, and a variable costs-to-sales ratio of 65%.

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

The clothing industry is considered to have a high degree of operating leverage.

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.

A project that adds zero economic value:

Break-even revenues on an accounting basis typically indicate a:

The option to abandon a project inexpensively is likely to have more value when the project:

A project with which one of these sets of values would you be most apt to reject?

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?

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

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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