Question 1

How much could NPV be affected by a worst-case scenario of 25% reduction from the $3 million in expected annual cash flows on a 5-year project with 10% cost of capital?

Accepted Answer

A)  $2,843,090 
B)  $3,750,000 
C)  $4,578,825 
D)  $6,155,274 
A)  $2,843,090 
B)  $3,750,000 
C)  $4,578,825 
D)  $6,155,274

Question 2

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 focuse

Question 3

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

Accepted Answer

A)  project is ensured to be successful. 
B)  project's discount rate should be reduced. 
C)  economic forecasts are possibly overly optimistic. 
D)  interaction of the variables should be considered. 
A)  project is ensured to be successful. 
B)  project's discount rate should be reduced. 
C)  economic forecasts are possibly overly optimistic. 
D)  interaction of the variables should be considered.

Question 4

Why is managerial flexibility important in capital budgeting?

Accepted Answer

Some projects may take on added value be

Question 5

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

Accepted Answer

Some of the more common problems in the

Question 6

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 will increase from 68% to 80%.What will happen to break-even level of revenues?

Accepted Answer

A)  A reduction to the level of $875,000 
B)  A reduction to the level of $2,890,625 
C)  An increase to the level of $3,500,000 
D)  An increase to the level of $3,625,000 
A)  A reduction to the level of $875,000 
B)  A reduction to the level of $2,890,625 
C)  An increase to the level of $3,500,000 
D)  An increase to the level of $3,625,000

Question 7

Which 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.

Question 8

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

Accepted Answer

A)  project will break even only in accounting terms. 
B)  project's EVA will be greater than zero but less than the opportunity cost of capital. 
C)  project will have a negative EVA. 
D)  discount rate should be reduced. 
A)  project will break even only in accounting terms. 
B)  project's EVA will be greater than zero but less than the opportunity cost of capital. 
C)  project will have a negative EVA. 
D)  discount rate should be reduced.

Question 9

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 10

Sensitivity analysis takes into consideration the interrelationship of variables.

Accepted Answer

A) True 
 B)False

Question 11

The option to alter production technology gives managers:

Accepted Answer

A)  the flexibility to adapt to changing situations. 
B)  increased cash flow from operations. 
C)  the opportunity to expand production. 
D)  the ability to expand product lines. 
A)  the flexibility to adapt to changing situations. 
B)  increased cash flow from operations. 
C)  the opportunity to expand production. 
D)  the ability to expand product lines.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Calculate the economic break-even level of sales for a project requiring an investment of $3,000,000 and providing as cash flows .15 * sales less $250,000.Assume the project will generate these cash flows for 10 years and that the discount rate is 10%.

Accepted Answer

A)  $3,254,890 
B)  $3,504,890 
C)  $4,921,549 
D)  $19,686,667 
A)  $3,254,890 
B)  $3,504,890 
C)  $4,921,549 
D)  $19,686,667

Question 14

The break-even level of revenues represents the point at which the firm has:

Accepted Answer

A)  zero pretax profit. 
B)  zero net present value. 
C)  covered all opportunity costs. 
D)  covered all fixed and variable costs. 
A)  zero pretax profit. 
B)  zero net present value. 
C)  covered all opportunity costs. 
D)  covered all fixed and variable costs.

Question 15

Which of the following statements is likely to be correct for a decision tree that indicates a 30% chance of making a $250,000 profit and a 70% chance of sustaining a $140,000 loss?

Accepted Answer

A)  The decision should be yes whenever the amount of possible profit exceeds the amount of possible loss. 
B)  The decision should be no whenever there is a possibility of loss. 
C)  The expected value is positive before discounting. 
D)  The expected value is negative before discounting. 
A)  The decision should be yes whenever the amount of possible profit exceeds the amount of possible loss. 
B)  The decision should be no whenever there is a possibility of loss. 
C)  The expected value is positive before discounting. 
D)  The expected value is negative before discounting.

Question 16

Using a computer model to repeatedly vary the combination of project variables in order to compare 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 17

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 18

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

Accepted Answer

For most large corporations there are tw

Question 19

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

Accepted Answer

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

Question 20

A project that has zero EVA:

Accepted Answer

A)  has a positive NPV. 
B)  has an NPV of zero. 
C)  has a negative NPV. 
D)  all of these. 
A)  has a positive NPV. 
B)  has an NPV of zero. 
C)  has a negative NPV. 
D)  all of these.

Exam 10: Project Analysis

How much could NPV be affected by a worst-case scenario of 25% reduction from the $3 million in expected annual cash flows on a 5-year project with 10% cost of capital?

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?

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

Why is managerial flexibility important in capital budgeting?

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

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 will increase from 68% to 80%.What will happen to break-even level of revenues?

Which of the following descriptions is representative of scenario analysis?

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

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

Sensitivity analysis takes into consideration the interrelationship of variables.

The option to alter production technology gives managers:

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

Calculate the economic break-even level of sales for a project requiring an investment of $3,000,000 and providing as cash flows .15 * sales less $250,000.Assume the project will generate these cash flows for 10 years and that the discount rate is 10%.

The break-even level of revenues represents the point at which the firm has:

Which of the following statements is likely to be correct for a decision tree that indicates a 30% chance of making a $250,000 profit and a 70% chance of sustaining a $140,000 loss?

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

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

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

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

A project that has zero EVA:

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Introduction to Corporate Financing

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