Question 1

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 2

Describe the process of sensitivity analysis and list some of the common variables that you would expect to analyze.

Accepted Answer

Beginning from the initial forecast of p

Question 3

Operating leverage increases with fixed cost.

Accepted Answer

A) True 
 B)False

Question 4

If forecasted sales exceed the accounting break-even level but are less than the economic break-even level, the project has a:

Accepted Answer

A)  positive NPV but earns less than the discount rate. 
B)  negative NPV but earns more than the discount rate. 
C)  net loss on the income statement. 
D) net profit on the income statement. 
A)  positive NPV but earns less than the discount rate. 
B)  negative NPV but earns more than the discount rate. 
C)  net loss on the income statement. 
D) net profit on the income statement.

Question 5

A decision tree shows a 30% probability of $2 million in returns and a 70% chance of $1 million in returns. What is the maximum you would invest today in this project if the cash inflow occurs one year in the future and the discount rate is 10%?

Accepted Answer

A)  $818,181.82 
B)  $1,181,818.18 
C)  $1,300,000.00 
D) $1,430,000.00 
A)  $818,181.82 
B)  $1,181,818.18 
C)  $1,300,000.00 
D) $1,430,000.00

Question 6

Analysis results indicate that a project's level of success is primarily dependent upon the firm controlling the variable costs. What type of analysis was conducted?

Accepted Answer

A)  Sensitivity analysis 
B)  Break-even analysis 
C)  Scenario analysis 
D) Real option analysis 
A)  Sensitivity analysis 
B)  Break-even analysis 
C)  Scenario analysis 
D) Real option analysis

Question 7

What percentage change in sales will occur if pretax profits decrease by 13.8% when the DOL is 3.8?

Accepted Answer

A)  0.28% 
B)  -2.75% 
C)  -3.63% 
D) 10.00% 
A)  0.28% 
B)  -2.75% 
C)  -3.63% 
D) 10.00%

Question 8

Firms that lack competitive advantages will:

Accepted Answer

A)  have difficulty finding positive NPV projects for investment. 
B)  be forced to capture larger market shares to be profitable. 
C)  avoid the need to conduct sensitivity analyses. 
D) be forced to operate with a high degree of operating leverage. 
A)  have difficulty finding positive NPV projects for investment. 
B)  be forced to capture larger market shares to be profitable. 
C)  avoid the need to conduct sensitivity analyses. 
D) be forced to operate with a high degree of operating leverage.

Question 9

In a graphic depiction of accounting break-even analysis, the greater the slope of the total cost line, the higher the:

Accepted Answer

A)  level of fixed costs. 
B)  level of total revenue. 
C)  number of units sold. 
D) percentage of variable costs to sales. 
A)  level of fixed costs. 
B)  level of total revenue. 
C)  number of units sold. 
D) percentage of variable costs to sales.

Question 10

Discuss decision trees, including how they can be useful and how they can be risky.

Accepted Answer

A decision tree is the diagram represent

Question 11

A silver mine can yield 10,000 ounces of silver at a variable cost of $8 per ounce. The fixed costs of operating the mine are $10,000 per year. In half the years, silver can be sold for $12 per ounce; in the other years, silver can be sold for only $6 per ounce. Ignoring taxes, what is the average cash flow you will receive from the mine if it is always kept in operation and the silver is always sold in the year it is mined? What happens to the average cash flow from the mine if you can shut down the mine in years of low silver prices?

Accepted Answer

Expenses = (10,000 × $8) + $10,000 = $90

Question 12

Conflicts of interest between shareholders and managers may result in the sacrifice of attractive capital budgeting proposals.

Accepted Answer

A) True 
 B)False

Question 13

Which one of the following offers the most plausible scenario for a firm that maintained a constant degree of operating leverage when its level of fixed costs doubled?

Accepted Answer

A)  Depreciation expense increased. 
B)  The variable cost percentage decreased. 
C)  Sales revenues declined. 
D) Pretax profits decreased. 
A)  Depreciation expense increased. 
B)  The variable cost percentage decreased. 
C)  Sales revenues declined. 
D) Pretax profits decreased.

Question 14

A project that breaks even in accounting terms will surely have a negative NPV.

Accepted Answer

A) True 
 B)False

Question 15

Competitive advantage is an important element of many successful capital budgeting proposals.

Accepted Answer

A) True 
 B)False

Question 16

Which one of the following industries has the highest level of operating leverage?

Accepted Answer

A)  Steel 
B)  Paper 
C)  Hotels 
D) Machinery 
A)  Steel 
B)  Paper 
C)  Hotels 
D) Machinery

Question 17

Calculate the economic break-even level of sales for a project requiring an investment of $3 million and providing annual cash flows equal to 15% of sales less $250,000. None of the initial investment is recoverable. Assume the project will generate these cash flows for 10 years and the discount rate is 10%.

Accepted Answer

A)  $3,254,890 
B)  $3,504,890 
C)  $4,921,575 
D) $1,686,667 
A)  $3,254,890 
B)  $3,504,890 
C)  $4,921,575 
D) $1,686,667

Question 18

Define DOL, discuss the factors that affect DOL, and explain how DOL should be interpreted.

Accepted Answer

DOL is an acronym that stands for degree

Question 19

The accounting break-even level of sales represents the point where:

Accepted Answer

A)  fixed costs are covered. 
B)  variable costs are covered. 
C)  fixed costs and variable costs are covered. 
D) fixed costs, variable costs, and depreciation are covered. 
A)  fixed costs are covered. 
B)  variable costs are covered. 
C)  fixed costs and variable costs are covered. 
D) fixed costs, variable costs, and depreciation are covered.

Question 20

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

Accepted Answer

Some of the more common problems in the

Exam 10: Project Analysis

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

Describe the process of sensitivity analysis and list some of the common variables that you would expect to analyze.

Operating leverage increases with fixed cost.

If forecasted sales exceed the accounting break-even level but are less than the economic break-even level, the project has a:

A decision tree shows a 30% probability of $2 million in returns and a 70% chance of $1 million in returns. What is the maximum you would invest today in this project if the cash inflow occurs one year in the future and the discount rate is 10%?

Analysis results indicate that a project's level of success is primarily dependent upon the firm controlling the variable costs. What type of analysis was conducted?

What percentage change in sales will occur if pretax profits decrease by 13.8% when the DOL is 3.8?

Firms that lack competitive advantages will:

In a graphic depiction of accounting break-even analysis, the greater the slope of the total cost line, the higher the:

Discuss decision trees, including how they can be useful and how they can be risky.

Conflicts of interest between shareholders and managers may result in the sacrifice of attractive capital budgeting proposals.

Which one of the following offers the most plausible scenario for a firm that maintained a constant degree of operating leverage when its level of fixed costs doubled?

A project that breaks even in accounting terms will surely have a negative NPV.

Competitive advantage is an important element of many successful capital budgeting proposals.

Which one of the following industries has the highest level of operating leverage?

Define DOL, discuss the factors that affect DOL, and explain how DOL should be interpreted.

The accounting break-even level of sales represents the point where:

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

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

Filters