Exam 10: Project Analysis

Assume a 5-year project has a base-case NPV of $213,000, a tax rate of 34%, and a cost of capital of 14%. What will be the worst-case NPV if the annual cash flows are reduced in that scenario by $35,000 for each of the 5 years?

Why is managerial flexibility important in capital budgeting?

What is the maximum percentage of variable costs to sales that a firm could have and still break even with $5 million in revenues, $1 million in fixed costs, and $500,000 of depreciation?

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

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

Weston's has variable costs that average 68% of sales. If fixed costs increase by $1, what will be the increase in the break-even level of revenues?

Fixed costs including depreciation have increased at Leverage Inc., from $4 million to $5.3 million in an effort to reduce variable costs. What must the new variable cost percentage of sales be to break even from an accounting perspective at $20 million?

Which one of the following techniques may be more appropriate to analyze projects with interrelated variables?

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

The degree of operating leverage (DOL) shows the relationship between sales and pretax profits.

The Corner Market has fixed costs of $1,600, depreciation of $1,200, a tax rate of 35%, and a cost of capital of 12%. Variable costs represent 67% of sales. What minimum level of sales must the market obtain to avoid a net loss on its income statement?

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

The accounting break-even point for a firm is a function of its:

Recognizing that it may be in managers' best interests to be overly optimistic when proposing projects, how might firms effectively control this impulse?

"What-if" questions ask what will happen to a project in various circumstances.

A firm has fixed costs of $1.2 million and depreciation of $1 million. At a sales level of $3.6 million, the variable costs of $2.304 million. What is the accounting break-even level of sales?

The difference between an NPV break-even level of sales and an accounting break-even level of sales is the:

Explain how a manager can use a decision tree to explain a proposed project to other members of a management team. What benefits might be realized from this approach?

Which one of the following statements is correct concerning sensitivity analysis?

How are sensitivity, scenario, and break-even analysis used to see the effect of an error in forecasts on project profitability?