Question 1

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

Accepted Answer

A)  project will break even 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 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 2

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 would increase from 68% to 80%.What would be the change in the break-even level of revenues?

Accepted Answer

A)  Increase of $609,375 
B)  Increase of $574,750 
C)  Decrease of $211,250 
D)  Decrease of $341,675 
A)  Increase of $609,375 
B)  Increase of $574,750 
C)  Decrease of $211,250 
D)  Decrease of $341,675

Question 3

Which one of the following capital budgeting proposals is most apt to be associated with 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 4

What is the economic break-even level of sales for a project costing $4,000,000 and generating annual cash flows equal to 0.30 × 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)  $3,859,789 
D)  $13,783,333 
A)  $2,093,654 
B)  $2,359,047 
C)  $3,859,789 
D)  $13,783,333

Question 5

The purpose of sensitivity analysis is to show:

Accepted Answer

A)  the optimal level of capital expenditures. 
B)  how price changes affect break-even volume. 
C)  seasonal variation in product demand. 
D)  how variables in a project affect profitability. 
A)  the optimal level of capital expenditures. 
B)  how price changes affect break-even volume. 
C)  seasonal variation in product demand. 
D)  how variables in a project affect profitability.

Question 6

Conflicts of interest between shareholders and managers may result in the sacrifice of attractive capital budgeting proposals.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

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

Question 8

A firm with a DOL of 4.5 generates pretax profits of $1 million.If depreciation expense is $600,000,what are its other fixed costs?

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 9

A project offers a 30% probability of a payoff after one year of $2 million and a 70% chance of a payoff of $1 million.What is the maximum you would invest in this project today if the discount rate is 10%?

Accepted Answer

A)  $818,181.82 
B)  $1,181,818.18 
C)  $1,300,000.00 
D)  $1,430,000.00 
A)  $818,181.82 
B)  $1,181,818.18 
C)  $1,300,000.00 
D)  $1,430,000.00

Question 10

A capital budget shows a proposed list of investments.

Accepted Answer

A) True 
 B)False

Question 11

Which one of the following appears to be a more likely result from using sensitivity analysis?

Accepted Answer

A)  Agreement on the appropriate discount rate 
B)  Determination of whether to finance with debt or equity 
C)  Isolation of the pivotal factor in project profitability 
D)  Selection of the best capital budgeting project 
A)  Agreement on the appropriate discount rate 
B)  Determination of whether to finance with debt or equity 
C)  Isolation of the pivotal factor in project profitability 
D)  Selection of the best capital budgeting project

Question 12

If MacCaugh's pilot project is successful,it will be able to build a plant with an NPV of $2 million in 1 year's time.Otherwise the pilot investment will be valueless.If the discount rate is 20% and the chances of success are 50%,how much can MacCaugh afford to spend on the pilot project?

Accepted Answer

A)  $1 million. 
B)  $2 million. 
C)  $1.667 million. 
D)  $833,333. 
A)  $1 million. 
B)  $2 million. 
C)  $1.667 million. 
D)  $833,333.

Question 13

Scenario analysis allows managers to look at different and sometimes inconsistent combinations of variables.

Accepted Answer

A) True 
 B)False

Question 14

The economic break-even point of a project can be found by:

Accepted Answer

A)  setting the discount rate equal to the DOL. 
B)  solving for the annual sales that will equate total revenue with total cost. 
C)  solving for the annual sales that will give the project an NPV of zero. 
D)  solving for the level of sales that will give the project an IRR of zero. 
A)  setting the discount rate equal to the DOL. 
B)  solving for the annual sales that will equate total revenue with total cost. 
C)  solving for the annual sales that will give the project an NPV of zero. 
D)  solving for the level of sales that will give the project an IRR of zero.

Question 15

What-if analysis is not crucial to capital budgeting.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

The accounting break-even point for a firm is a function of its:

Accepted Answer

A)  net cash flows and depreciation expense. 
B)  fixed costs and gross profit on each sale. 
C)  variable costs and tax rate. 
D)  revenues and fixed costs. 
A)  net cash flows and depreciation expense. 
B)  fixed costs and gross profit on each sale. 
C)  variable costs and tax rate. 
D)  revenues and fixed costs.

Question 18

The option to switch between using oil or natural gas in a power station is:

Accepted Answer

A)  an option to expand. 
B)  an option to abandon. 
C)  a production flexibility option. 
D)  a timing option. 
A)  an option to expand. 
B)  an option to abandon. 
C)  a production flexibility option. 
D)  a timing option.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

The branches on a decision tree

Accepted Answer

A)  illustrate possible combinations of fixed and variable costs. 
B)  are a convenient way to illustrate the results of a sensitivity analysis. 
C)  show possible project break-even points. 
D)  show possible management decisions and possible uncertain consequences. 
A)  illustrate possible combinations of fixed and variable costs. 
B)  are a convenient way to illustrate the results of a sensitivity analysis. 
C)  show possible project break-even points. 
D)  show possible management decisions and possible uncertain consequences.

Exam 10: Project Analysis

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

Which one of the following capital budgeting proposals is most apt to be associated with a conflict of interests?

What is the economic break-even level of sales for a project costing $4,000,000 and generating annual cash flows equal to 0.30 × sales − $450,000? Assume the project will last 10 years and require a discount rate of 12%.

The purpose of sensitivity analysis is to show:

Conflicts of interest between shareholders and managers may result in the sacrifice of attractive capital budgeting proposals.

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

A firm with a DOL of 4.5 generates pretax profits of $1 million.If depreciation expense is $600,000,what are its other fixed costs?

A project offers a 30% probability of a payoff after one year of $2 million and a 70% chance of a payoff of $1 million.What is the maximum you would invest in this project today if the discount rate is 10%?

A capital budget shows a proposed list of investments.

Which one of the following appears to be a more likely result from using sensitivity analysis?

If MacCaugh's pilot project is successful,it will be able to build a plant with an NPV of $2 million in 1 year's time.Otherwise the pilot investment will be valueless.If the discount rate is 20% and the chances of success are 50%,how much can MacCaugh afford to spend on the pilot project?

Scenario analysis allows managers to look at different and sometimes inconsistent combinations of variables.

The economic break-even point of a project can be found by:

What-if analysis is not crucial to capital budgeting.

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

The accounting break-even point for a firm is a function of its:

The option to switch between using oil or natural gas in a power station is:

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

The branches on a decision tree

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