Question 1

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. A

Question 2

"What-if" questions ask what will happen to a project in various circumstances.

Accepted Answer

A) True 
 B)False  True

Question 3

Calculate the NPV 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 C

Question 4

Assume a 5-year project has a base-case NPV of $213,000,a tax rate of 34%,and a cost of capital of 14%.What will be the worst-case NPV if the annual after-tax cash flows are reduced in that scenario by $35,000 for each of the 5 years?

Accepted Answer

A)  −$92,842.17 
B)  −$120,157.83 
C)  $92,842.17 
D)  $120,157.83 
A)  −$92,842.17 
B)  −$120,157.83 
C)  $92,842.17 
D)  $120,157.83

Question 5

Which statement is not correct?

Accepted Answer

A)  project proposers tend to be overconfident about the likely success of the project. 
B)  project proposers often exaggerate the likely profitability in order to gain acceptance. 
C)  overconfidence and enthusiasm can result in increased effort. 
D)  most project proposals are based on very conservative forecasts. 
A)  project proposers tend to be overconfident about the likely success of the project. 
B)  project proposers often exaggerate the likely profitability in order to gain acceptance. 
C)  overconfidence and enthusiasm can result in increased effort. 
D)  most project proposals are based on very conservative forecasts.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

A project that has zero economic value added:

Accepted Answer

A)  has a positive NPV. 
B)  has an NPV of zero. 
C)  has a negative NPV. 
D)  is at the accounting break-even point. 
A)  has a positive NPV. 
B)  has an NPV of zero. 
C)  has a negative NPV. 
D)  is at the accounting break-even point.

Question 8

The option to abandon a project inexpensively has particular value when:

Accepted Answer

A)  the equipment has a ready second-hand value. 
B)  you can be confident about future profits. 
C)  the project looks to have a very large NPV. 
D)  has a low degree of operating leverage. 
A)  the equipment has a ready second-hand value. 
B)  you can be confident about future profits. 
C)  the project looks to have a very large NPV. 
D)  has a low degree of operating leverage.

Question 9

Positive NPV projects exist because:

Accepted Answer

A)  analysts select high discount rates. 
B)  most projects are unique and innovative. 
C)  cash-flow projections are extended into the future. 
D)  firms hold competitive advantages. 
A)  analysts select high discount rates. 
B)  most projects are unique and innovative. 
C)  cash-flow projections are extended into the future. 
D)  firms hold competitive advantages.

Question 10

Fixed costs including depreciation have increased at Leverage Inc.,from $4 million to $5.3 million.Suppose that the company now breaks even on an accounting basis with sales of $20 million.What must be the break-even variable cost as a percentage of sales?

Accepted Answer

A)  69.2% 
B)  65.8% 
C)  73.5% 
D)  76.7% 
A)  69.2% 
B)  65.8% 
C)  73.5% 
D)  76.7%

Question 11

What happens to the NPV of a two-year project if sales less costs are increased in each year from $1,000 to $1,500? Assume the firm has a 35% tax rate,and a 15% cost of capital.

Accepted Answer

A)  NPV increases by $812.85. 
B)  NPV increases by $528.36. 
C)  NPV increases by $500.00. 
D)  NPV increases by $282.61. 
A)  NPV increases by $812.85. 
B)  NPV increases by $528.36. 
C)  NPV increases by $500.00. 
D)  NPV increases by $282.61.

Question 12

For a firm with a DOL of 3.5,an increase in sales of 6% will:

Accepted Answer

A)  increase pretax profits by 3.5%. 
B)  decrease pretax profits by 3.5%. 
C)  increase pretax profits by 21.0%. 
D)  increase pretax profits by 1.71%. 
A)  increase pretax profits by 3.5%. 
B)  decrease pretax profits by 3.5%. 
C)  increase pretax profits by 21.0%. 
D)  increase pretax profits by 1.71%.

Question 13

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

Accepted Answer

A)  zero pretax profit. 
B)  zero net present value. 
C)  covered all opportunity costs. 
D)  covered the fixed and variable costs but not the depreciation. 
A)  zero pretax profit. 
B)  zero net present value. 
C)  covered all opportunity costs. 
D)  covered the fixed and variable costs but not the depreciation.

Question 14

The DOL measures the percentage change in ______ given a percentage change in _____.

Accepted Answer

A)  fixed costs; sales 
B)  profits; fixed costs 
C)  profits; sales 
D)  operating leverage; fixed costs 
A)  fixed costs; sales 
B)  profits; fixed costs 
C)  profits; sales 
D)  operating leverage; fixed costs

Question 15

If project sales exceed the accounting break-even point,but the project has a negative EVA,then 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 but negative NPV. 
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 but negative NPV.

Question 16

What is the level of profits for a firm in which DOL = 5 and fixed costs including depreciation = $300,000?

Accepted Answer

A)  $60,000 
B)  $75,000 
C)  $1,200,000 
D)  $1,500,000 
A)  $60,000 
B)  $75,000 
C)  $1,200,000 
D)  $1,500,000

Question 17

One difference between an NPV break-even level of sales and an accounting break-even level of sales is the:

Accepted Answer

A)  consideration of the opportunity cost of capital. 
B)  consideration of interest expense. 
C)  allowance of the sales level to vary in response to changes in demand. 
D)  inclusion of income taxes. 
A)  consideration of the opportunity cost of capital. 
B)  consideration of interest expense. 
C)  allowance of the sales level to vary in response to changes in demand. 
D)  inclusion of income taxes.

Question 18

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

Accepted Answer

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

Question 19

The strategic planning portion of the capital budgeting process is essentially a "bottom-up" process.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 10: Project Analysis

Firms that lack competitive advantages will:

"What-if" questions ask what will happen to a project in various circumstances.

Assume a 5-year project has a base-case NPV of $213,000,a tax rate of 34%,and a cost of capital of 14%.What will be the worst-case NPV if the annual after-tax cash flows are reduced in that scenario by $35,000 for each of the 5 years?

Which statement is not correct?

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

A project that has zero economic value added:

The option to abandon a project inexpensively has particular value when:

Positive NPV projects exist because:

Fixed costs including depreciation have increased at Leverage Inc.,from $4 million to $5.3 million.Suppose that the company now breaks even on an accounting basis with sales of $20 million.What must be the break-even variable cost as a percentage of sales?

What happens to the NPV of a two-year project if sales less costs are increased in each year from $1,000 to $1,500? Assume the firm has a 35% tax rate,and a 15% cost of capital.

For a firm with a DOL of 3.5,an increase in sales of 6% will:

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

The DOL measures the percentage change in ______ given a percentage change in _____.

If project sales exceed the accounting break-even point,but the project has a negative EVA,then the project has a:

What is the level of profits for a firm in which DOL = 5 and fixed costs including depreciation = $300,000?

One difference between an NPV break-even level of sales and an accounting break-even level of sales is the:

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

The strategic planning portion of the capital budgeting process is essentially a "bottom-up" process.

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

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

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

The DOL measures the percentage change in __ given a percentage change in _.