Question 1

The degree of operating leverage is equal to:

Accepted Answer

A)  the percentage change in quantity divided by the percentage change in OCF. 
B)  the percentage change in sales divided by the percentage change in OCF. 
C)  1 + FC/OCF. 
D)  1 + VC/OCF. 
E)  1 - (FC + V
C) /OCF. 
A)  the percentage change in quantity divided by the percentage change in OCF. 
B)  the percentage change in sales divided by the percentage change in OCF. 
C)  1 + FC/OCF. 
D)  1 + VC/OCF. 
E)  1 - (FC + V
C) /OCF.

Question 2

-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?

Accepted Answer

A)  7.51 percent 
B)  7.82 percent 
C)  8.13 percent 
D)  8.49 percent 
E)  8.62 percent 
A)  7.51 percent 
B)  7.82 percent 
C)  8.13 percent 
D)  8.49 percent 
E)  8.62 percent

Question 3

Fixed costs:

Accepted Answer

A)  change as a small quantity of output produced changes. 
B)  are constant over the short-run regardless of the quantity of output produced. 
C)  are defined as the change in total costs when one more unit of output is produced. 
D)  are subtracted from sales to compute the contribution margin. 
E)  can be ignored in scenario analysis since they are constant over the life of a project. 
A)  change as a small quantity of output produced changes. 
B)  are constant over the short-run regardless of the quantity of output produced. 
C)  are defined as the change in total costs when one more unit of output is produced. 
D)  are subtracted from sales to compute the contribution margin. 
E)  can be ignored in scenario analysis since they are constant over the life of a project.

Question 4

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

Accepted Answer

A)  method of analysis used to make the decision. 
B)  initial cash outflow. 
C)  ability to recoup any investment in net working capital. 
D)  accuracy of the projected cash flows. 
E)  length of the project. 
A)  method of analysis used to make the decision. 
B)  initial cash outflow. 
C)  ability to recoup any investment in net working capital. 
D)  accuracy of the projected cash flows. 
E)  length of the project.

Question 5

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

Accepted Answer

A)  determining how fixed costs affect NPV 
B)  estimating the residual value of fixed assets 
C)  identifying the potential range of reasonable outcomes 
D)  determining the minimal level of sales required to break-even on an accounting basis 
E)  determining the minimal level of sales required to break-even on a financial basis 
A)  determining how fixed costs affect NPV 
B)  estimating the residual value of fixed assets 
C)  identifying the potential range of reasonable outcomes 
D)  determining the minimal level of sales required to break-even on an accounting basis 
E)  determining the minimal level of sales required to break-even on a financial basis

Question 6

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?

Accepted Answer

A)  $0 
B)  $12,500 
C)  $62,309 
D)  $74,816 
E)  $86,500 
A)  $0 
B)  $12,500 
C)  $62,309 
D)  $74,816 
E)  $86,500

Question 7

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

Accepted Answer

A)  degree of sensitivity 
B)  degree of operating leverage 
C)  accounting break-even 
D)  cash break-even 
E)  contribution margin 
A)  degree of sensitivity 
B)  degree of operating leverage 
C)  accounting break-even 
D)  cash break-even 
E)  contribution margin

Question 8

-At an output level of 50,000 units,you calculate that the degree of operating leverage is 1.8.What will be the percentage change in operating cash flow if the new output level is 54,500 units?

Accepted Answer

A)  5.00 percent 
B)  6.17 percent 
C)  16.20 percent 
D)  17.43 percent 
E)  20.00 percent 
A)  5.00 percent 
B)  6.17 percent 
C)  16.20 percent 
D)  17.43 percent 
E)  20.00 percent

Question 9

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

Accepted Answer

The answer of What are the key features of the...

Question 10

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

Accepted Answer

A)  hiring temporary workers from an employment agency rather than hiring part-time production employees 
B)  subcontracting portions of the project rather than purchasing new equipment to do all the work in-house 
C)  leasing equipment on a long-term basis rather than buying equipment 
D)  lowering the projected selling price per unit 
E)  changing the proposed labor-intensive production method to a more capital intensive method 
A)  hiring temporary workers from an employment agency rather than hiring part-time production employees 
B)  subcontracting portions of the project rather than purchasing new equipment to do all the work in-house 
C)  leasing equipment on a long-term basis rather than buying equipment 
D)  lowering the projected selling price per unit 
E)  changing the proposed labor-intensive production method to a more capital intensive method

Question 11

Which one of the following will be used in the computation of the best-case analysis of a proposed project?

Accepted Answer

A)  minimal number of units that are expected to be produced and sold 
B)  the lowest expected salvage value that can be obtained for a project's fixed assets 
C)  the most anticipated sales price per unit 
D)  the lowest variable cost per unit that can reasonably be expected 
E)  the highest level of fixed costs that is actually anticipated 
A)  minimal number of units that are expected to be produced and sold 
B)  the lowest expected salvage value that can be obtained for a project's fixed assets 
C)  the most anticipated sales price per unit 
D)  the lowest variable cost per unit that can reasonably be expected 
E)  the highest level of fixed costs that is actually anticipated

Question 12

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?

Accepted Answer

A)  $58,800 
B)  $59,400 
C)  $61,300 
D)  $87,600 
E)  $145,600 
A)  $58,800 
B)  $59,400 
C)  $61,300 
D)  $87,600 
E)  $145,600

Question 13

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

Accepted Answer

A)  forecasting 
B)  scenario 
C)  sensitivity 
D)  simulation 
E)  break-even 
A)  forecasting 
B)  scenario 
C)  sensitivity 
D)  simulation 
E)  break-even

Question 14

The contribution margin per unit is equal to the:

Accepted Answer

A)  sales price per unit minus the total costs per unit. 
B)  variable cost per unit minus the fixed cost per unit. 
C)  sales price per unit minus the variable cost per unit. 
D)  pre-tax profit per unit. 
E)  aftertax profit per unit. 
A)  sales price per unit minus the total costs per unit. 
B)  variable cost per unit minus the fixed cost per unit. 
C)  sales price per unit minus the variable cost per unit. 
D)  pre-tax profit per unit. 
E)  aftertax profit per unit.

Question 15

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:

Accepted Answer

A)  will never pay back. 
B)  has a zero net present value. 
C)  is operating at a higher level than if it were operating at its cash break-even level. 
D)  is operating at a higher level than if it were operating at its financial break-even level. 
E)  is lowering the total net income of the firm. 
A)  will never pay back. 
B)  has a zero net present value. 
C)  is operating at a higher level than if it were operating at its cash break-even level. 
D)  is operating at a higher level than if it were operating at its financial break-even level. 
E)  is lowering the total net income of the firm.

Question 16

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:

Accepted Answer

A)  maximum possible level of production. 
B)  minimum possible level of production. 
C)  financial break-even point. 
D)  accounting break-even point. 
E)  cash break-even point. 
A)  maximum possible level of production. 
B)  minimum possible level of production. 
C)  financial break-even point. 
D)  accounting break-even point. 
E)  cash break-even point.

Question 17

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value.To determine that sales level you should compute the:

Accepted Answer

A)  contribution margin per unit and set that margin equal to the fixed costs per unit. 
B)  contribution margin per unit. 
C)  accounting break-even point. 
D)  cash break-even point. 
E)  financial break-even point. 
A)  contribution margin per unit and set that margin equal to the fixed costs per unit. 
B)  contribution margin per unit. 
C)  accounting break-even point. 
D)  cash break-even point. 
E)  financial break-even point.

Question 18

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 $775 per unit,give or take 2 percent.The tax rate is 34 percent.The company is conducting a sensitivity analysis with fixed costs of $590,000.What is the OCF given this analysis?

Accepted Answer

A)  $337,975 
B)  $285,350 
C)  $368,250 
D)  $374,874 
E)  $414,350 
A)  $337,975 
B)  $285,350 
C)  $368,250 
D)  $374,874 
E)  $414,350

Question 19

Steele Insulators is analyzing a new type of insulation for interior walls.Management has compiled the following information to determine whether or not this new insulation should be manufactured.The insulation project has an initial fixed asset requirement of $1.3 million,which would be depreciated straight-line to zero over the 12-year life of the project.Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000.What is the degree of operating leverage for this project?

Accepted Answer

A)  3.78 
B)  3.92 
C)  4.19 
D)  4.27 
E)  4.53 
A)  3.78 
B)  3.92 
C)  4.19 
D)  4.27 
E)  4.53

Question 20

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?

Accepted Answer

A)  83,814 
B)  96,470 
C)  123,910 
D)  167,630 
E)  212,000 
A)  83,814 
B)  96,470 
C)  123,910 
D)  167,630 
E)  212,000

Exam 11: Project Analysis and Evaluationpart Five: Risk and Return

The degree of operating leverage is equal to:

Fixed costs:

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

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

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 one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

-At an output level of 50,000 units,you calculate that the degree of operating leverage is 1.8.What will be the percentage change in operating cash flow if the new output level is 54,500 units?

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

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

Which one of the following will be used in the computation of the best-case analysis of a proposed 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?

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

The contribution margin per unit is equal to the:

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:

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value.To determine that sales level you should compute the:

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?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flowpart Two: Financial Statements and Long-Term Financial Planning

Working With Financial Statements

Long-Term Financial Planning and Growthpart Three: Valuation of Future Cash Flows

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuationpart Four: Capital Budgeting

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons From Capital Market History

Return, Risk, and the Security Market Linepart Six: Cost of Capital and Long-Term Financial Policy

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policypart Seven: Short-Term Financial Planning and Management

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Managementpart Eight: Topics in Corporate Finance

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters