Exam 10: Project Analysis

What is the change in the NPV of a one-year project if fixed costs are increased from $400 to $600, the firm is profitable, has a 35% tax rate, and employs a 12% cost of capital?

What are some of the practical problems of capital budgeting in large corporations?

What level of management is responsible for originating capital budgeting proposals?

Scenario analysis allows managers to look at different but consistent combinations of interrelated variables.

A 6-year project has an economic break-even level of sales of $5 million and a discount rate of 8%. The annual cash inflows are equal to 10% of sales minus $300,000. What was the initial investment in the project assuming that none of the investment is recoverable when the project ends?

A capital budget shows a proposed list of investments.

If the level of sales is less than that calculated as the economic break-even level, then the:

A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation and sales of $3 million. How does the current level of sales compare to the accounting break-even sales level?

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

The option to alter production technology:

Which one of the following would not be included as a traditional capital budgeting project?

When management selects new production technologies that require a higher proportion of fixed costs than that of its operations, then the implementation of those technologies will:

One of the problems inherent in sensitivity analysis is that:

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

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

Sensitivity analysis takes into consideration the interrelationship of variables.

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

The option to abandon a project becomes more valuable as the possible outcomes become more varied.

If sensitivity analysis indicates none of the individual variables will cause a negative NPV under pessimistic conditions, then the:

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