Exam 11: Project Analysis and Evaluation

We are evaluating a project that costs $854,000, has a 15-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 154,000 units per year. Price per unit is $41, variable cost per unit is $20, and fixed costs are $865,102 per year. The tax rate is 33 percent, and we require a 14 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within $\pm$ 14 percent. What is the worst-case NPV?

Sunset United is analyzing a proposed project. The company expects to sell 15,000 units, plus or minus 4 percent. The expected variable cost per unit is $120 and the expected fixed costs are $311,000. The fixed and variable cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is $74,000. The tax rate is 35 percent. The sales price is estimated at $170 a unit, plus or minus 2 percent. What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $125?

Forecasting risk is defined as the possibility that:

Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project:

Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. What is the contribution margin per unit under the best case scenario?

What is operating leverage and why is it important in the analysis of capital expenditure projects?

The degree of operating leverage is equal to:

Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 2 percent. The expected variable cost per unit is $11 and the expected fixed costs are $287,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent. What is the net income under the worst case scenario?

Variable costs can be defined as the costs that:

A proposed project has a contribution margin per unit of $13.10, fixed costs of $74,000, depreciation of $12,500, variable costs per unit of $22, and a financial break-even point of 11,360 units. What is the operating cash flow at this level of output?

Which of the following variables will be at their highest expected level under a worst case scenario? I. fixed cost II. sales price III. variable cost IV. sales quantity

What are the key features of the accounting, cash, and financial break-even points?

You are in charge of a project that has a degree of operating leverage of 2.64. What will happen to the operating cash flows if the number of units you sell increase by 6 percent?

Fixed costs:

Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life. The projections include a sales price of $38, variable cost per unit of $18.50, and fixed costs of $32,000. The operating cash flow is $19,700. What is the break-even quantity?

Given the following, which feature identifies the most desirable level of output for a project?

Cool Shades, Inc. (CSI) manufactures biotech sunglasses. The variable materials cost is $1.69 per unit, and the variable labor cost is $3.04 per unit. Suppose the firm incurs fixed costs of $750,000 during a year in which total production is 450,000 units and the selling price is $11.50 per unit. What is the cash break-even point?

Mr. Bear, your boss, will only agree to accept a project that, as a minimum, provides a rate of return equal to the requirement he has set for the project. Given this, explain how you can use break-even analysis to ascertain which projects will be acceptable to him as you don't want to risk hearing him growl if you waste his time presenting him with a project that is unacceptable.

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?