Exam 11: Project Analysis and Evaluation

McGilla Golf has decided to sell a new line of golf clubs.The clubs will sell for $500 per set and have a variable cost of $200 per set.The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years.The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs.The high-priced clubs sell at $700 and have variable costs of $300.The company will also increase sales of its cheap clubs by 9,000 sets.The cheap clubs sell for $200 and have variable costs of $100 per set.The fixed costs each year will be $7,559,000.The company has also spent $1,133,000 on research and development for the new clubs.The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis over the life of the project.The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project.The tax rate is 40 percent,and the cost of capital is 8 percent.What is the IRR?

The degree of operating leverage is equal to:

Which one of the following statements concerning variable costs is correct?

Spencer Tools would like to offer a special product to its best customers.However,the firm wants to limit its maximum potential loss on this product to the firm's initial investment in the project.The fixed costs are estimated at $21,000,the depreciation expense is $11,000,and the contribution margin per unit is $12.50.What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?

Assume you graph a project's net present value given various sales quantities.Which one of the following is correct regarding the resulting function?

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers.These requests are seeking funding for positive net present value projects.The CFO continues to deny all funding requests due to the financial situation of the company.Apparently,the company is:

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 2 percent,the operating cash flow increases by 5.3 percent.What is the degree of operating leverage if the contribution margin per unit is $47?

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?

At the accounting break-even point,Swiss Mountain Gear sells 14,600 ski masks at a price of $12 each.At this level of production,the depreciation is $58,000 and the variable cost per unit is $4.What is the amount of the fixed costs at this production level?

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?

By definition,which one of the following must equal zero at the accounting break-even point?

Assume that a country experiences a financial crisis that causes the nation's financial markets to freeze in a manner that prevents a private firm from raising capital from any source.Explain how project analysis conducted by that firm would work in this situation.

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

Valerie just completed analyzing a project.Her analysis indicates that the project will have a 6-year life and require an initial cash outlay of $320,000.Annual sales are estimated at $589,000 and the tax rate is 34 percent.The net present value is a negative $320,000.Based on this analysis,the project is expected to operate at the:

Precise Machinery is analyzing a proposed project.The company expects to sell 2,250 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 3 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 amount of the total costs per unit under the worst case scenario?

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.The tax rate is 35 percent.The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $755.What is the operating cash flow based on this analysis?

Ted is analyzing a project using simulation.His focus is limited to the short-term.To ease the simulation process,he is combining expenses into various categories.Which one of the following should he include in the fixed cost category?

The Coffee Express has computed its fixed costs to be $0.34 for every cup of coffee it sells given annual sales of 212,000 cups.The sales price is $1.49 per cup while the variable cost per cup is $0.63.How many cups of coffee must it sell to break-even on a cash basis?

Sensitivity analysis is based on: