Exam 13: Risk Analysis and Project Evaluation

Quineboag Textiles In. has calculated it's degree of operating leverage at 3.00. If Quineboag can increase sales from $5,000,000 to $5,250,000, operating income should increase from $500,000 to

Using simulation provides the financial manager with a point estimate of an investment's net present value or internal rate of return.

What is the expected net operating profit after tax (NOPAT) if the most likely estimates are used?

The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January. It will cost them $5,000 per night for theater rental, event insurance and professional musicians. The theater will also take 10% of gross ticket sales. How many tickets must they sell at $10.00 per ticket to break even?

Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each. Variable cost of a croissant is $0.75. Fixed costs are $150,000, depreciation $200,000 and the tax rate is 25%. If the number of croissants sold increases by 10%, and all other variables remain the same, how much will free cash flow increase?

Projects may appear to have less risk when real options are considered.

If a project reaches the accounting break-even point in every year of its life, it must also have a positive NPV.

What is the expected NPV of the project with the option to expand?

Pederson Home Heating Inc. anticipates that cash flows from home heating fuel sales next year will be $800,000 if the winter is mild, $1,000,000 if winter is average, and $1,500,000 if winter is exceptionally cold. The probability of an average winter is 60%, while the probability of either a mild or an exceptionally cold winter is 20%. What is Pederson's expected cash flow from fuel sales next winter?

Which of the following is NOT a typical real option in capital budgeting?

Accounting break-even analysis solves for the level of sales that will result in

Which of the following is a real option with respect to a capital budgeting decision?

The NPV break-even point means that a company has covered its cost of capital.

Which of the following are reasons to analyze the risk of capital projects?

What is the NPV of the project if it is expanded?

Project Zeta is expected to produce after-tax cash flows of $30 million in year 1, $40 million in year 2, and $50 million in year 3. If the company uses a 12% required rate of return, what is the most it can invest in this project and break even with respect to NPV?