Deck 10: Project Analysis

Question 1

What-if analysis is not crucial to capital budgeting.

Answer 1

False

Question 2

Scenario analysis allows managers to look at different but consistent combinations of interrelated variables.

Answer 2

True

Question 3

The NPV break-even level of sales will be higher than the accounting break-even level.

Answer 3

True

Question 4

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

Question 5

A capital budget shows a proposed list of investments.

Question 6

The strategic planning portion of the capital budgeting process is essentially a "bottom-up" process.

Question 7

A project that breaks even in accounting terms will surely have a negative NPV.

Question 8

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

Question 9

The option to abandon a project becomes more valuable as the possible outcomes become more varied.

Question 10

Operating leverage increases with fixed cost.

Question 11

The greater the DOL,the greater the protection against operating losses during economic downturns.

Question 12

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

Question 13

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

Question 14

What-if analysis can help identify the inputs that are most worth refining before you commit to a project.

Question 15

The degree of operating leverage shows the relationship between sales and pretax profits.

Question 16

Decision trees display the possible outcomes associated with a series of related decisions.

Question 17

The inputs that are most worth refining before you commit to a project are the ones that have the greatest potential to alter project NPV.

Question 18

"What-if" questions ask what will happen to a project in various circumstances.

Question 19

Sensitivity analysis takes into consideration the interrelationship of variables.

Question 20

The level of sales at which project NPV is zero is referred to as the accounting break-even point.

Question 21

Calculate the break-even level of sales,assuming: $1.4 million fixed costs,$400,000 depreciation expense,and variable costs-to-sales ratio of 65 percent.

A) $2,769,231
B) $2,857,143
C) $4,000,000
D) $5,142,857

Question 22

What percentage change in sales occurs if profits increase by 3 percent when the firm's degree of operating leverage is 4.5?

A) 0.33 percent
B) 0.67 percent
C) 1.5 percent
D) 3.33 percent

Question 23

A project that simply breaks even on an accounting basis gives you your money back but does not cover the opportunity cost of the capital tied up in the project.

Question 24

If a firm's DOL is 4.0 when its profit is $2,000,000 and its depreciation is $500,000,how much fixed cost does it have?

A) $5,000,000
B) $5,500,000
C) $6,000,000
D) $7,500,000

Question 25

A decision tree shows a 30 percent probability of $2 million in returns and a 70 percent chance of $1 million in returns.What is the maximum you would invest today in this project if the cash in-flow occurs one year in the future and the discount rate is 10 percent?

A) $818,182
B) $1,181,818
C) $1,300,000
D) $1,363,636

Question 26

What is the fixed-cost expenditure for a firm with a DOL of 4.5 that generates pretax profits of $1 million and has $600,000 in depreciation expense?(Enter the answer in millions)

A) $1.1 million
B) $2.1 million
C) $2.9 million
D) $3.9 million

Question 27

How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million,fixed costs of $400,000,and a 60 percent ratio of variable costs to sales?

A) $144,000
B) $266,667
C) $400,000
D) $666,667

Question 28

What is the break-even level of revenues for a firm with $6 million in sales,variable costs of $3.9 million,fixed costs of $1.2 million,and depreciation of $1 million?

A) $3,428,571
B) $6,100,000
C) $6,285,714
D) $6,557,377

Question 29

If a decision tree indicates an expected NPV of $1 million,then:

A) at least one of the outcomes had a negative NPV.
B) all of the outcomes had a positive NPV.
C) $1 million Is the firm's minimum guaranteed profit.
D) the project still contains uncertainty.

Question 30

How much does each additional sales dollar contribute toward profit for a firm with $5 million break-even level of revenues and $1.5 million in fixed costs including depreciation?

A) $0.30
B) $0.33
C) $0.50
D) $0.67

Question 31

A firm with 60 percent of sales going to variable costs,$1.5 million fixed costs,and $500,000 depreciation would show what accounting profit with sales of $3 million? Ignore taxes.

A) Zero loss
B) $370,000 loss
C) $666,667 Loss
D) $800,000 loss

Question 32

Market demand allowed Acme Corp.to raise its price by 20 percent to $60.What is the new level of break-even revenues if fixed charges including depreciation are $1 million and variable costs were 70 percent of the old price?

A) $2,000,000
B) $2,400,000
C) $2,857,143
D) $3,333,333

Question 33

Approximately how much was paid to invest in a project that has an NPV break-even level of sales of $5 million,cash flows determined by: .1 × sales - $300,000,a six-year life,and an 8 percent discount rate?

A) $416,667
B) $924,576
C) $1,016,678
D) $2,311,450

Question 34

Barrier Corporation is performing a sensitivity analysis on one of its product.The product currently sells for $75 per unit,with variable cost of $46 per unit and fixed costs of $100,000.Barrier currently sells 80,000 units of this product.Barrier is considering reducing its price by 10%.If prices decrease,then it is expected that units sold will increase by 8%.Calculate the change in operating income.

A) $462,400 decrease
B) $248,500 decrease
C) $462,400 increase
D) $248,500 increase

Question 35

Calculate the NPV break-even level of sales for a project requiring an investment of $3,000,000 and providing as cash flows: .15 × sales less $250,000.Assume the project will generate these cash flows for 10 years and that the discount rate is 10 percent.

A) $3,254,890
B) $3,504,890
C) $4,921,549
D) $19,686,667

Question 36

What is the level of profits for a firm in which DOL = 5 and fixed costs including depreciation = $300,000?

A) $60,000
B) $75,000
C) $1,200,000
D) $1,500,000

Question 37

Ajax Corporation is performing a sensitivity analysis on one of its product.The product currently sells for $210 per unit,with variable cost of $90 per unit and fixed costs of $400,000.Ajax currently sells 12,000 units of this product.Ajax is considering raising its price by 15%.If prices increase,then it is expected that units sold will decrease by 10%.Calculate the change in operating income.

A) $196,200 decrease
B) $248,500 decrease
C) $196,200 increase
D) $248,500 increase

Question 38

What is the NPV break-even level of sales for a project costing $4,000,000 and generating cash flows according to .30 × sales - $450,000? Assume the project will last 10 years and requires a discount rate of 12 percent.

A) $2,093,654
B) $2,359,047
C) $3,859,798
D) $13,783,333

Question 39

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

Question 40

How much could NPV be affected by a worst-case scenario of 25 percent reduction from the $3 million in expected annual cash flows on a five-year project with 10 percent cost of capital?

A) $2,843,090
B) $3,750,000
C) $4,578,825
D) $6,155,274

Question 41

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70 percent variable costs?

A) an increase of $0.30.
B) an increase of $1.00.
C) an increase of $1.43.
D) an increase of $3.33

Question 42

Firms that lack competitive advantages will:

A) have difficulty finding positive NPV projects for investment.
B) be forced to capture larger market shares to be profitable.
C) avoid the need to conduct sensitivity analyses.
D) be forced to operate with a high degree of operating leverage.

Question 43

Capital rationing may be beneficial to a firm if it:

A) reduces a firm's interest expense.
B) weeds out proposals with weaker or biased NPVs.
C) allows managers to select their favourite projects.
D) increases funds to be used for other purposes.

Question 44

Fixed costs:

A) are a constant percentage of sales revenues.
B) vary with the level of depreciation expense.
C) are constant with changes in the level of output.
D) are inversely related to the level of output.

Question 45

A firm with $600,000 fixed costs and $200,000 depreciation is expected to produce $225,000 in profits.What is its DOL?

A) 3.56
B) 3.67
C) 4.56
D) 4.67

Question 46

An 8 year project is estimated to produce a product with the following information: selling price = $80 per unit; variable costs are $65 per unit; fixed costs are $20,000; required return is 10%; initial investment = $200,000.Calculate the accounting break-even.

A) 3,000
B) 3,833
C) 4,000
D) 4,833

Question 47

Which of the following changes,if of a sufficient magnitude,could turn a negative NPV project into a positive NPV project?

A) a decrease in the estimated annual sales.
B) an increase in the discount rate.
C) an increase in the initial investment.
D) a decrease in the fixed costs.

Question 48

Fixed costs including depreciation have increased at Leverage,Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable-cost percentage be to leave break-even at $20 million?

A) 60 percent
B) 65 percent
C) 70 percent
D) 75 percent

Question 49

One characteristic of scenario analysis is that:

A) it allows only one variable at a time to change.
B) it limits variation to only three of the more likely variable combinations.
C) all or nearly all variations are analyzed, regardless of likelihood.
D) managers generate each variation by hand.

Question 50

Positive NPV projects most often occur because:

A) analysts select sufficiently low discount rates.
B) most projects are unique and innovative.
C) cash-flow projections are extended into the future.
D) of competitive advantages held by firms.

Question 51

A 4 year project is estimated to produce a product with the following information: selling price = $57 per unit; variable costs are $32 per unit; fixed costs are $9,000; required return is 12%; initial investment = $18,000.Calculate the accounting break-even.

A) 597
B) 540
C) 525
D) 490

Question 52

The difference between an NPV break-even level of sales and an accounting break-even level of sales is:

A) the consideration of opportunity cost.
B) the consideration of depreciation expense.
C) allowing the sales level to vary in response to changes in demand.
D) the inclusion of income taxes.

Question 53

An 8 year project is estimated to produce a product with the following information: selling price = $80 per unit; variable costs are $65 per unit; fixed costs are $20,000; required return is 10%; initial investment = $200,000.Calculate the financial break-even.

A) 3,000
B) 3,833
C) 4,000
D) 4,833

Question 54

Which of the following techniques may be more appropriate to analyze projects with interrelated variables?

A) sensitivity analysis
B) scenario analysis
C) break-even analysis
D) DOL analysis

Question 55

Calculate the ratio of variable-costs-to-sales for a firm with: $3,000,000 accounting break-even revenues,$1.2 million fixed costs,and $450,000 depreciation.

A) 40 percent
B) 45 percent
C) 55 percent
D) 60 percent

Question 56

Students,and managers alike,are continually reminded to avoid negative-NPV projects.Which of the following projects may be acceptable even at a loss?

A) a capacity expansion project
B) a cost-reduction project
C) a pollution-control project
D) a machine replacement project

Question 57

If pretax profits decrease by 13.8 percent when the DOL is 3.8,then the decrease in sales is:

A) 0.28 percent.
B) 2.75 percent.
C) 3.63 percent.
D) 10.00 percent.

Question 58

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 will increase from 68 percent to 80 percent.What will happen to break-even level of revenues?

A) a reduction to the level of $875,000
B) a reduction to the level of $2,890,625
C) an increase to the level of $3,500,000
D) an increase to the level of $3,625,000

Question 59

A 4 year project is estimated to produce a product with the following information: selling price = $57 per unit; variable costs are $32 per unit; fixed costs are $9,000; required return is 12%; initial investment = $18,000.Calculate the financial break-even.

A) 597
B) 540
C) 525
D) 490

Question 60

What is the maximum percentage of variable costs in relation to sales that a firm could experience and still break even with $5 million revenue,$1 million fixed costs,and $500,000 depreciation?

A) 30 percent
B) 70 percent
C) 80 percent
D) 90 percent

Question 61

Break-even revenues on an accounting basis typically indicate a:

A) negative NPV for the firm.
B) positive NPV for the firm.
C) high degree of operating leverage.
D) downturn in the business cycle.

Question 62

If sensitivity analysis indicates none of the individual variables will cause a negative NPV under pessimistic conditions,then the:

A) project is assured to be successful.
B) project's discount rate should be reduced.
C) economic forecasts are possibly overly optimistic.
D) interaction of the variables should be considered.

Question 63

Forecasting inconsistencies can be minimized by:

A) allowing managers to establish their own forecasts.
B) establishing a standardized economic forecast to be used year in, year out.
C) generating current economic forecasts that are used throughout the firm.
D) extending the current forecast into the future.

Question 64

Sensitivity analysis evaluates projects by:

A) forecasting changes in interest rates that would increase financing costs.
B) recording profitability changes while changing one variable at a time.
C) insuring that the project sponsor has proper incentives.
D) testing for interrelated variables.

Question 65

For a firm with a DOL of 3.5,an increase in sales of 6 percent will:

A) increase pretax profits by 3.5 percent.
B) decrease pretax profits by 3.5 percent.
C) increase pretax profits by 21.0 percent.
D) increase pretax profits by 1.71 percent.

Question 66

The accounting break-even point is that level of sales where:

A) sales revenue equals variable costs.
B) sales revenue equals variable plus fixed costs.
C) EBIT equals depreciation expense, and, thus cash flow equals zero.
D) EBIT equals zero.

Question 67

Which of the following is not subtracted from sales revenues to determine pretax profit?

A) depreciation
B) fixed costs
C) interest expense
D) variable costs

Question 68

A firm with high operating leverage is expected to:

A) have high variable costs.
B) have low fixed costs.
C) have a high degree of profitability.
D) perform better when sales are high.

Question 69

The break-even level of revenues represents the point at which the firm has:

A) Zero pretax profit.
B) Zero net present value.
C) Covered all opportunity costs.
D) covered all fixed and variable costs.

Question 70

The opportunity to abandon a project inexpensively is likely to have more value when the product:

A) incurs high fixed costs of production.
B) incurs high variable costs of production.
C) is generating a positive NPV.
D) has a steady degree of operating leverage.

Question 71

In a graphic depiction of accounting break-even analysis,the larger the slope of the total cost line,the:

A) higher the level of fixed costs.
B) higher the level of total revenue.
C) higher the number of units sold.
D) higher the percentage of variable costs.

Question 72

When management selects production technologies that include a high proportion of fixed costs,they:

A) decrease their DOL.
B) increase their DOL.
C) decrease their NPV break-even level of sales.
D) reduce the NPV of their cash flows.

Question 73

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

A) agreement on the appropriate discount rate.
B) determine whether to finance with debt or equity.
C) isolation of pivotal factor in project profitability.
D) select the best capital budgeting project.

Question 74

One of the problems inherent in sensitivity analysis is that:

A) NPVs do not change once a project is introduced.
B) most projects are equally sensitive to all variables.
C) it can be difficult to define the range of outcomes.
D) the cost of conducting the analysis is excessive.

Question 75

Recognizing that it may be in managers' best interests to be overly optimistic when proposing projects,how might firms effectively control this impulse?

A) employ capital rationing
B) discontinue investment proposals
C) fire managers after their first mistake
D) fund all project proposals

Question 76

Which of the following descriptions is representative of scenario analysis?

A) one variable at a time is allowed to change.
B) it isolates the unknowns that belong in the model.
C) different combinations of variables are analyzed.
D) it represents the "top-down" approach.

Question 77

Which of the following appears to be the most suitable investment?

A) revenues cover fixed and variable costs.
B) investment breaks even in an accounting sense.
C) investment breaks even in an NPV sense.
D) revenues exceed cost of goods sold.

Question 78

The capital budget "bottom up" perspective should be consistent with the firm's "top down" view through:

A) growth in sales.
B) strategic plans.
C) current level of funds.
D) dividend policy.

Question 79

According to decision-tree analysis,investment projects should be discontinued when:

A) the probability of success is less than 50 percent.
B) NPV is calculated to be negative.
C) DOL increases from previous levels.
D) the possibility of a failing outcome exists.

Question 80

The break-even level of sales represents the point where:

A) fixed costs are covered.
B) variable costs are covered.
C) fixed costs and variable costs are covered.
D) fixed costs, variable costs, and depreciation are covered.