Deck 11: Project Analysis and Evaluation

Question 1

You have put together a set of cash flow forecasts for a project and have found, on your first
calculation, that the NPV is positive. You should accept the project because you are certain to
increase shareholder wealth.

Answer 1

False

Question 2

Sensitivity analysis allows a firm to ask what-if type questions in capital budgeting.

Answer 2

True

Question 3

Just because the cash flows of a project are positive doesn't mean the NPV is positive.

Answer 3

True

Question 4

Projected sales is generally least subject to forecasting risk.

Question 5

The OCF is equal to zero in a financial break-even calculation.

Question 6

The net present value is equal to zero at the accounting break-even point.

Question 7

Scenario analysis allows a firm to ask what-if type questions in capital budgeting.

Question 8

Simulation analysis allows a firm to ask what-if type questions in capital budgeting.

Question 9

You have put together a set of cash flow forecasts for a project and have found, on your first
calculation, that the NPV is positive. You should use scenario or sensitivity analysis to investigate
the project in greater detail.

Question 10

Break-even analysis allows a firm to ask what-if type questions in capital budgeting.

Question 11

Net income is equal to zero at the accounting break-even point.

Question 12

You have put together a set of cash flow forecasts for a project and have found, on your first
calculation, that the NPV is positive. You should try to identify some source of value in the project.

Question 13

If a project's base case NPV is positive, the project should automatically be accepted.

Question 14

The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the
contribution margin.

Question 15

The IRR is equal to the required rate of return in a financial break-even calculation.

Question 16

Projected fixed costs is generally least subject to forecasting risk.

Question 17

The discounted payback is equal to the life of the project in a financial break-even calculation.

Question 18

You have put together a set of cash flow forecasts for a project and have found, on your first
calculation, that the NPV is positive. You should try to assess the degree of forecasting risk that
exists with the project.

Question 19

Initial investment is generally least subject to forecasting risk.

Question 20

The quantity sold at the accounting break-even point is equal to the total fixed costs plus
depreciation divided by the contribution margin.

Question 21

The accounting break-even point has an operating cash flow is zero.

Question 22

All else equal, if you decrease your level of fixed costs, cash break-even will also fall.

Question 23

A project that just breaks even on an accounting basis will not pay back.

Question 24

The accounting break-even point has a net income is zero.

Question 25

A project that just breaks even on an accounting basis must have a positive NPV.

Question 26

A project that just breaks even on a financial basis has a PI equal to zero.

Question 27

The NPV is equal to zero in a financial break-even calculation.

Question 28

All else the same, if a firm revises its production process to use more labour and less machinery, the
firm will have smaller changes in OCF for a given change in sales quantity.

Question 29

In a financial break-even calculation, the present value of the cash inflows equals the amount of the
initial investment.

Question 30

In a financial break-even calculation, the project never pays back on a discounted basis.

Question 31

A project that just breaks even on a financial basis has a discounted payback equal to the project's
life.

Question 32

The accounting break-even point has a net present value is zero.

Question 33

In a financial break-even calculation, the operating cash flow is at a level that produces a net
present value of zero.

Question 34

A project that just breaks even on a financial basis will not pay back.

Question 35

A project that just breaks even on a cash basis will not pay back.

Question 36

A project that just breaks even on an accounting basis has a discounted payback period equal to its
life.

Question 37

All else equal, if you decrease your level of fixed costs, accounting break-even will also fall.

Question 38

A project that just breaks even on a cash basis must have a zero NPV.

Question 39

A project that just breaks even on a cash basis has a discounted payback period equal to its life.

Question 40

The accounting break-even point has an internal rate of return is zero.

Question 41

In a financial break-even calculation, the payback period of the project is equal to the life of the
project.

Question 42

All else the same, if a firm revises its production process to use more labour and less machinery, the
firm will have an increased capital intensity.

Question 43

Fixed costs are variable over long periods of time.

Question 44

Fixed costs per unit remain constant over a given range of production output.

Question 45

All else equal, if you decrease your level of fixed costs, operating cash flow will also fall.

Question 46

Fixed costs must be paid even if production is halted.

Question 47

Variable costs can be ascertained with certainty when evaluating a proposed project.

Question 48

All else the same, if you decrease fixed costs, accounting break-even will also decline.

Question 49

The higher the contribution margin, the lower the financial break-even point.

Question 50

Variable costs minus fixed costs equal marginal costs.

Question 51

All else the same, if a firm revises its production process to use more labour and less machinery, the
firm will have a decreased accounting break-even.

Question 52

Fixed costs change with the quantity of output produced.

Question 53

The higher the contribution margin, the lower the cash break-even point.

Question 54

Variable costs are equal to zero when production is equal to zero.

Question 55

An increase in variable costs increases the operating cash flow.

Question 56

All else the same, if you decrease fixed costs, will also operating cash flow decline.

Question 57

All else the same, if you decrease fixed costs, cash break-even will also decline.

Question 58

Fixed costs are generally affected by the amount of fixed assets owned by a firm.

Question 59

The higher the contribution margin, the lower the accounting break-even point.

Question 60

Fixed costs are equal to zero when production is zero.

Question 61

The higher the degree of operating leverage, the lower the break-even point, regardless of how it's
measured.

Question 62

The higher the degree of operating leverage, the more the danger from forecasting risk.

Question 63

A project with a high degree of operating leverage has a high forecasting risk.

Question 64

Fixed costs are constant for a given period of time.

Question 65

The higher the degree of operating leverage, the higher the break-even point, regardless of how it's
measured.

Question 66

A project with a low degree of operating leverage is capital intensive.

Question 67

Variable costs are equal to zero when production is zero.

Question 68

A project with a high degree of operating leverage has an initial cash outlay that is generally
relatively large in relation to the size of the project.

Question 69

The option to wait is defined as the situation where operations are shut down for a period of time.

Question 70

Variable costs can be forecast with a high degree of certainty beforehand.

Question 71

All else the same, if a firm revises its production process to use more labour and less machinery, the
firm will have an increased degree of operating leverage.

Question 72

The higher the degree of operating leverage, the lower is the risk of forecasting error.

Question 73

Variable costs change with the quantity of output produced.

Question 74

A firm that substitutes labour for machinery and equipment is said to be capital-intensive.

Question 75

A project with a high degree of operating leverage is capital intensive.

Question 76

A project with a high degree of operating leverage has relatively high variable costs.

Question 77

Capital intensive projects have a high degree of operating leverage.

Question 78

All else the same, if you decrease fixed costs, operating leverage will also decline.

Question 79

Degree of operating leverage (DOL) is equal to the percentage change in OCF divided by the
percentage change in sales quantity.

Question 80

The higher the degree of operating leverage, the greater is the risk of forecasting error.