Question 1

A firm with $600,000 fixed costs and $200,000 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

What is the approximate economic break-even sales for a project costing $4,000,000 and generating cash flows according to .30 *sales - $450,000? Assume the project will last 10 years and require a discount rate of 12%.

Accepted Answer

A)  $2,093,654 
B)  $2,359,047 
C)  $3,859,798 
D)  $13,783,333 
A)  $2,093,654 
B)  $2,359,047 
C)  $3,859,798 
D)  $13,783,333

Question 3

The option for a firm to expand future production has value because:

Accepted Answer

A)  future production will be profitable. 
B)  the option requires no investment today. 
C)  the future holds uncertainty. 
D)  today's production costs are lower than in the future. 
A)  future production will be profitable. 
B)  the option requires no investment today. 
C)  the future holds uncertainty. 
D)  today's production costs are lower than in the future.

Question 4

Which of the following industry has low operating leverage?

Accepted Answer

A)  Steel 
B)  Railroads 
C)  Electric utilities 
D)  Autos 
A)  Steel 
B)  Railroads 
C)  Electric utilities 
D)  Autos

Question 5

Define DOL and discuss what affects it and how to interpret it.

Accepted Answer

DOL is an acronym that stands for degree

Question 6

The inputs that are most worth refining before you commit to a project are the ones that have the greatest potential to alter project NPV.

Accepted Answer

A) True 
 B)False

Question 7

Operating leverage increases with fixed cost.

Accepted Answer

A) True 
 B)False

Question 8

What happens to the NPV of a one-year project if fixed costs are increased from $400 to $600,the firm is not profitable,has a 35% tax rate,and employs a 12% cost of capital?

Accepted Answer

A)  NPV decreases by $200.00. 
B)  NPV decreases by $178.57. 
C)  NPV decreases by $130.00. 
D)  NPV decreases by $113.04. 
A)  NPV decreases by $200.00. 
B)  NPV decreases by $178.57. 
C)  NPV decreases by $130.00. 
D)  NPV decreases by $113.04.

Question 9

What-if analysis is not crucial to capital budgeting.

Accepted Answer

A) True 
 B)False

Question 10

What happens to a firm with high operating leverage when the overall level of sales is very high?

Accepted Answer

A)  The firm will have higher levels of fixed costs. 
B)  The firm will enjoy high profits. 
C)  The firm will not break even in accounting terms. 
D)  The firm will have a reduced level of fixed costs. 
A)  The firm will have higher levels of fixed costs. 
B)  The firm will enjoy high profits. 
C)  The firm will not break even in accounting terms. 
D)  The firm will have a reduced level of fixed costs.

Question 11

Which of the following capital budgeting proposals is most likely to display a conflict of interests?

Accepted Answer

A)  The proposal with the highest NPV 
B)  The proposal with the longest payback period 
C)  The proposal with the highest IRR and quickest payback 
D)  The proposal to solve pollution problems cited by the EPA 
A)  The proposal with the highest NPV 
B)  The proposal with the longest payback period 
C)  The proposal with the highest IRR and quickest payback 
D)  The proposal to solve pollution problems cited by the EPA

Question 12

(Expansion Option)Now suppose that Hit or Miss Sports from the previous problem can expand production if the project is successful.By paying its workers overtime,it can increase production by 25,000 units; the variable cost of each ball will be higher,however,equal to $35 per unit.By how much does this option to expand production increase the NPV of the project?

Accepted Answer

The additional after-tax cash flow from

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Approximately how much was paid to invest in a project that has an economic break-even level of sales of $5 million,cash flows determined by .1 * sales - $300,000,a 6-year life,and an 8% discount rate?

Accepted Answer

A)  $416,667 
B)  $924,575 
C)  $1,016,678 
D)  $2,311,450 
A)  $416,667 
B)  $924,575 
C)  $1,016,678 
D)  $2,311,450

Question 15

Which of the following is least likely to be responsible for a regional manager's conflict of interest in promoting a capital budgeting proposal?

Accepted Answer

A)  Desire for professional advancement 
B)  Thorough knowledge of the region 
C)  Overly optimistic economic forecasts 
D)  The need for quick profitability 
A)  Desire for professional advancement 
B)  Thorough knowledge of the region 
C)  Overly optimistic economic forecasts 
D)  The need for quick profitability

Question 16

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 17

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70% variable costs?

Accepted Answer

A)  An increase of $0.30 
B)  An increase of $1.00 
C)  An increase of $1.43 
D)  An increase of $3.33 
A)  An increase of $0.30 
B)  An increase of $1.00 
C)  An increase of $1.43 
D)  An increase of $3.33

Question 18

Modern Artifacts can produce keepsakes that will be sold for $80 each.Nondepreciation fixed costs are $1,000 per year and variable costs are $60 per unit.If the project requires an initial investment of $3,000 and is expected to last for 5 years and the firm pays no taxes,what are the accounting and economic break-even levels of sales? The initial investment will be depreciated straight-line over 5 years to a final value of zero,and the discount rate is 10%.

Accepted Answer

Variable cost = 75% of revenue
Therefore

Question 19

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

Accepted Answer

A)  the probability of success is less than 50%. 
B)  NPV is calculated to be negative. 
C)  DOL increases from previous levels. 
D)  the possibility of a failing outcome exists. 
A)  the probability of success is less than 50%. 
B)  NPV is calculated to be negative. 
C)  DOL increases from previous levels. 
D)  the possibility of a failing outcome exists.

Question 20

When management selects production technologies that include a high proportion of fixed costs,it:

Accepted Answer

A)  decreases the DOL. 
B)  increases the DOL. 
C)  decreases the NPV-breakeven level of sales. 
D)  reduces the NPV of the cash flows. 
A)  decreases the DOL. 
B)  increases the DOL. 
C)  decreases the NPV-breakeven level of sales. 
D)  reduces the NPV of the cash flows.

Exam 10: Project Analysis

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

What is the approximate economic break-even sales for a project costing $4,000,000 and generating cash flows according to .30 *sales - $450,000? Assume the project will last 10 years and require a discount rate of 12%.

The option for a firm to expand future production has value because:

Which of the following industry has low operating leverage?

Define DOL and discuss what affects it and how to interpret it.

The inputs that are most worth refining before you commit to a project are the ones that have the greatest potential to alter project NPV.

Operating leverage increases with fixed cost.

What happens to the NPV of a one-year project if fixed costs are increased from $400 to $600,the firm is not profitable,has a 35% tax rate,and employs a 12% cost of capital?

What-if analysis is not crucial to capital budgeting.

What happens to a firm with high operating leverage when the overall level of sales is very high?

Which of the following capital budgeting proposals is most likely to display a conflict of interests?

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

Approximately how much was paid to invest in a project that has an economic break-even level of sales of $5 million,cash flows determined by .1 * sales - $300,000,a 6-year life,and an 8% discount rate?

Which of the following is least likely to be responsible for a regional manager's conflict of interest in promoting a capital budgeting proposal?

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

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70% variable costs?

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

When management selects production technologies that include a high proportion of fixed costs,it:

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