Question 1

A capital budget shows a proposed list of investments.

Accepted Answer

A) True 
 B)False

Question 2

While sensitivity analysis is forward-looking,scenario analysis attempts to reconstruct and analyze the past.

Accepted Answer

A) True 
 B)False

Question 3

One of the problems inherent in sensitivity analysis is that:

Accepted Answer

A)  NPVs do not change once a project is introduced. 
B)  most projects are equally sensitive to all variables. 
C)  it can be difficult to define the range of outcomes. 
D)  the cost of conducting the analysis is excessive. 
A)  NPVs do not change once a project is introduced. 
B)  most projects are equally sensitive to all variables. 
C)  it can be difficult to define the range of outcomes. 
D)  the cost of conducting the analysis is excessive.

Question 4

Which of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

Accepted Answer

A)  Sales 
B)  Depreciation schedule 
C)  Labor cost 
D)  Food cost 
A)  Sales 
B)  Depreciation schedule 
C)  Labor cost 
D)  Food cost

Question 5

Which of the following changes,if of a sufficient magnitude,could turn a negative NPV project into a positive NPV project?

Accepted Answer

A)  A decrease in the estimated annual sales 
B)  An increase in the discount rate 
C)  An increase in the initial investment 
D)  A decrease in the fixed costs 
A)  A decrease in the estimated annual sales 
B)  An increase in the discount rate 
C)  An increase in the initial investment 
D)  A decrease in the fixed costs

Question 6

A video rental store will cost $650,000 to open.Assuming annual sales of $1 million,variable costs of 35%,fixed costs of $300,000,depreciation of $100,000,and a tax rate of 35%,calculate the NPV of the project over a 10-year horizon (no inflation or salvage value assumed)with a 12% cost of capital.Conduct a sensitivity analysis by allowing investment,sales,variable costs,and fixed costs to vary by  $\pm$0% from their original estimates.Which variable appears to affect profitability the most?

Accepted Answer

@#IMG-DLM&
 If investment varies by  @#LAT-DLM&10% ($715,000

Question 7

Fixed costs including depreciation have increased at Leverage,Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable cost percentage be to leave break-even at $20 million?

Accepted Answer

A)  60% 
B)  65% 
C)  70% 
D)  75% 
A)  60% 
B)  65% 
C)  70% 
D)  75%

Question 8

What are some of the factors that will commonly affect the abandonment value of a project? When should abandonment be considered?

Accepted Answer

Perhaps the largest factors affecting th

Question 9

A firm with 60% of sales going to variable costs,$1.5 million fixed costs,and $500,000 depreciation would show what accounting profit with sales of $3 million? Ignore taxes.

Accepted Answer

A)  Zero loss 
B)  $370,000 loss 
C)  $666,667 loss 
D)  $800,000 loss 
A)  Zero loss 
B)  $370,000 loss 
C)  $666,667 loss 
D)  $800,000 loss

Question 10

Although sensitivity analysis can provide managers with keen insights,there can be problems with the reliability of the NPV revisions.Discuss potential reasons for these problems.

Accepted Answer

Sensitivity analysis sometimes picks arb

Question 11

What is the fixed-cost expenditure for a firm with a DOL of 4.5 that generates pretax profits of $1 million and has $600,000 in depreciation expense?

Accepted Answer

A)  $1.1 million 
B)  $2.1 million 
C)  $2.9 million 
D)  $3.9 million 
A)  $1.1 million 
B)  $2.1 million 
C)  $2.9 million 
D)  $3.9 million

Question 12

Which of the following would not be judged a traditional category of capital budgeting project?

Accepted Answer

A)  Machine replacement proposals 
B)  Salary adjustment proposals 
C)  New product proposals 
D)  Plant expansion proposals 
A)  Machine replacement proposals 
B)  Salary adjustment proposals 
C)  New product proposals 
D)  Plant expansion proposals

Question 13

If a firm's DOL is 4.0 with a profit of $2,000,000 and depreciation of $500,000,what are its fixed costs?

Accepted Answer

A)  $5,000,000 
B)  $5,500,000 
C)  $6,000,000 
D)  $7,500,000 
A)  $5,000,000 
B)  $5,500,000 
C)  $6,000,000 
D)  $7,500,000

Question 14

Which of the following may be responsible for a fair share of the perennial "project cost overruns"?

Accepted Answer

A)  Rapidly rising inflation 
B)  Delays in obtaining contracts and permits 
C)  Lack of raw materials 
D)  Forecasting bias by the sponsoring manager 
A)  Rapidly rising inflation 
B)  Delays in obtaining contracts and permits 
C)  Lack of raw materials 
D)  Forecasting bias by the sponsoring manager

Question 15

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

Question 16

The clothing industry is considered to have a high degree of operating leverage.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The economic break-even level of sales will be higher than the accounting break-even level.

Accepted Answer

A) True 
 B)False

Question 19

The level of sales at which project NPV is zero is referred to as the accounting break-even point.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)  deemphasizing that variable as a critical factor. 
B)  requiring a more detailed sales forecast. 
C)  that the initial sales forecasts were inflated. 
D)  reallocating fixed costs to this product. 
A)  deemphasizing that variable as a critical factor. 
B)  requiring a more detailed sales forecast. 
C)  that the initial sales forecasts were inflated. 
D)  reallocating fixed costs to this product.

Exam 10: Project Analysis

A capital budget shows a proposed list of investments.

While sensitivity analysis is forward-looking,scenario analysis attempts to reconstruct and analyze the past.

One of the problems inherent in sensitivity analysis is that:

Which of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

Which of the following changes,if of a sufficient magnitude,could turn a negative NPV project into a positive NPV project?

Fixed costs including depreciation have increased at Leverage,Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable cost percentage be to leave break-even at $20 million?

What are some of the factors that will commonly affect the abandonment value of a project? When should abandonment be considered?

A firm with 60% of sales going to variable costs,$1.5 million fixed costs,and $500,000 depreciation would show what accounting profit with sales of $3 million? Ignore taxes.

Although sensitivity analysis can provide managers with keen insights,there can be problems with the reliability of the NPV revisions.Discuss potential reasons for these problems.

What is the fixed-cost expenditure for a firm with a DOL of 4.5 that generates pretax profits of $1 million and has $600,000 in depreciation expense?

Which of the following would not be judged a traditional category of capital budgeting project?

If a firm's DOL is 4.0 with a profit of $2,000,000 and depreciation of $500,000,what are its fixed costs?

Which of the following may be responsible for a fair share of the perennial "project cost overruns"?

Which 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?

The clothing industry is considered to have a high degree of operating leverage.

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

The economic break-even level of sales will be higher than the accounting break-even level.

The level of sales at which project NPV is zero is referred to as the accounting break-even point.

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

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

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