Deck 9: Risk Analysis, Real Options, and Capital Budgeting

Question 1

To set up a decision tree,you should

A)assign the most optimistic values to a success and the most pessimistic values to a failure.
B)determine the cash flows that are most apt to occur given a set of circumstances.
C)assign a constant discount rate to all decisions within the tree.
D)ignore a project's initial cost.
E)use equal probabilities for success and failure.

Answer 1

determine the cash flows that are most apt to occur given a set of circumstances.

Question 2

To make a project accept/reject decision using a decision tree

A)you start in the middle of the decision tree and work both forward and backward through the decision process.
B)you start with the decisions that lie furthest into the future.
C)you make the decisions in the top half of the tree prior to those in the bottom half.
D)you begin with the decision at Time 0.
E)you can make the decisions in any order of time.

Answer 2

you start with the decisions that lie furthest into the future.

Question 3

In a decision tree,the accept/reject decision is dependent upon

A)cash flows,probabilities,and future decisions.
B)only the cash flows from the successful path.
C)only the cash flows and probabilities of the successful path.
D)the path where the probabilities sum to one.
E)only the lower half of the tree.

Answer 3

cash flows,probabilities,and future decisions.

Question 4

As a project's degree of sensitivity to variable costs increases,the

A)forecasting risk of the project decreases.
B)dependence of the final outcome on variable costs decreases.
C)more attention management should pay to the actual variable costs throughout the project.
D)lower the maximum potential value of the project.
E)lower the maximum potential loss of the project.

Question 5

Which one of these is a disadvantage of sensitivity analysis?

A)Sensitivity analysis may decrease the false sense of security among managers.
B)Sensitivity analysis fails to identify the key variable that affects a project's net present value.
C)Each variable in sensitivity analysis is treated in isolation.
D)A sophisticated computer program is required to conduct sensitivity analysis.
E)Sensitivity analysis assumes most variables will achieve their most optimistic value.

Question 6

In scenario analysis,which one of the following items is least apt to be assigned a range of values?

A)Sales price per unit
B)Variable cost per unit
C)Fixed cost
D)Initial cost
E)Sales quantity

Question 7

Which one of these occurs at the financial breakeven point?

A)Fixed costs equal variable costs
B)EBIT equals zero
C)Net income equals zero
D)Net present value equals zero
E)IRR equals zero

Question 8

Sensitivity analysis of a project is conducted by

A)changing the value of a single variable and computing the resulting change in the net present value.
B)changing the value of two project variables to determine their interdependency.
C)holding all variables to their base level and changing the project's required rate of return.
D)assigning either the best or the worst possible value to each variable and comparing the results to those of the expected case.
E)comparing actual values to projected values to determine which variable had the greatest variation.

Question 9

All else constant,as the variable cost per unit increases,the

A)net profit increases.
B)contribution margin decreases.
C)sensitivity to fixed costs decreases.
D)operating cash flow increases.
E)financial breakeven point decreases.

Question 10

Sensitivity analysis helps determine the

A)range of possible outcomes given possible ranges for each variable.
B)degree to which the net present value reacts to changes in a single variable.
C)net present value given the best and the worst possible situations.
D)degree to which a firm is reliant upon multiple economic factors changing simultaneously.
E)ideal level of variable costs in relation to the fixed costs of a project.

Question 11

The financial breakeven point determines which one of these values?

A)Total sales
B)Sales price
C)Variable cost per unit
D)Fixed costs
E)Sales quantity

Question 12

The point where a project produces a rate of return equal to the required rate of return is known as the

A)external breakeven point.
B)accounting profit breakeven point.
C)internal breakeven point.
D)financial breakeven point.
E)contribution margin breakeven point.

Question 13

Assuming the selling price is greater than the total cost per unit,the contribution margin must increase as

A)both the sales price and variable cost per unit increase.
B)the sales price per unit declines.
C)the difference between the sales price and the fixed cost per unit increases.
D)the gap between the sales price and the variable cost per unit widens.
E)the fixed cost per unit declines.

Question 14

Which term is used to represent the sales level that results in a project's net income exactly equalling zero?

A)Operational breakeven
B)Financial breakeven
C)Accounting profit breakeven
D)Cash breakeven
E)Present value breakeven

Question 15

In scenario analysis,the expected case is

A)determined by a firm's current level of sales and costs.
B)a firm's most optimistic outlook that is likely to occur.
C)the situation where a project obtains its financial breakeven point.
D)a firm's best guess of a future outcome.
E)based on a firm's historical average sales and costs.

Question 16

If a project breaks even on an accounting profit basis,then

A)the project's net present value will be zero.
B)its sales quantity will be higher than if the project were to break even on a financial basis.
C)the project's net present value will be negative.
D)it will also break even on a financial basis.
E)its contribution margin must be zero.

Question 17

Conducting scenario analysis helps managers see the

A)impact an individual variable has on the outcome of a project.
B)possible range of market prices for a firm's stock over the life of a project.
C)potential changes in long-term debt over the course of a proposed project.
D)potential range of outcomes from a proposed project.
E)distribution of funds to various independent capital projects.

Question 18

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

A)Variable costs minus fixed costs equal marginal costs.
B)Variable costs are equal to zero when production is equal to zero.
C)An increase in variable costs increases the operating cash flow.
D)Variable costs minus fixed costs equals the contribution margin.
E)Future variable costs are generally known with certainty.

Question 19

Ignoring taxes,which one of these is a correct formula for calculating the accounting profit breakeven point?

A)(Fixed costs - Depreciation)/ (Sales price - Variable costs)
B)Contribution margin / (Fixed costs + Total variable costs)
C)(Fixed costs + Depreciation)/ Contribution margin
D)(Sales price - Variable costs)/ (Fixed costs + Depreciation)
E)(Sales price - Variable costs - Fixed costs)/ Depreciation

Question 20

All else constant,the accounting profit breakeven level of sales will decrease when the

A)fixed costs increase.
B)contribution margin decreases.
C)depreciation expense decreases.
D)variable costs per unit increase.
E)selling price per unit decreases.

Question 21

A project with a current negative net present value

A)might have a positive net present value at a later date in time.
B)should still be accepted if it can breakeven on an accounting profit basis.
C)should still be accepted if its projected sales quantity is less than the financial breakeven point.
D)should be permanently rejected.
E)will always have a higher (less negative)net present value at a later time.

Question 22

To determine the lowest net present value that is likely to occur given a range of values for all of the relevant variables,a firm should conduct which type of analysis?

A)Sensitivity
B)Scenario
C)Present value breakeven
D)Financial breakeven
E)Cash flow breakeven

Question 23

Assume a project currently has a negative net present value.Which one of these expectations would indicate that the timing option for that project may have a positive value?

A)The life of the project's product is expected to decrease each year.
B)Competition in the project's product market is on the increase.
C)The demand for the project's product is expected to decrease within 6 months.
D)The project's cash flow projections are expected to remain constant over time.
E)The contribution margin for the project is expected to improve next year.

Question 24

The investment timing decision relates to

A)how long the cash flows last once a project is implemented.
B)how frequently the cash flows of a project occur.
C)how frequently the interest on the debt incurred to finance a project is compounded.
D)the decision as to when a project should be started.
E)the decision to either finance a project over time or pay out the initial cost in cash.

Question 25

Which real options have the ability to increase a project's NPV if they are included in project analysis?

A)Options to wait and to abandon
B)Options to expand and to wait
C)Options to abandon and to expand
D)Options to wait,abandon,and expand
E)Real options do not affect a project's NPV

Question 26

Fixed production costs are

A)directly related to labor costs per unit.
B)defined as costs per unit of time.
C)dependent upon the output quantity.
D)ignored in project analysis.
E)treated as sunk costs in project analysis.

Question 27

Monte Carlo simulation is based on assigning a ________ and analyzing the results.

A)single value to each of a project's variables
B)wide range of values to multiple variables simultaneously
C)wide range of values to a single variable
D)narrow range of values to two variables simultaneously
E)narrow range of values to a single variable

Question 28

If the option to abandon is ignored,the

A)initial cash flow of a project may be overstated.
B)net present value of a project may be understated.
C)net present value of a project will be stated at a time other than Time 0.
D)net present value of a project will be overstated.
E)initial cash flow of a project will be understated.

Question 29

Including the option to expand in project analysis will tend to

A)extend the duration of a project but not affect the project's net present value.
B)increase the cash flows of a project but decrease the project's net present value.
C)decrease the net present value of a project.
D)increase the net present value of a project.
E)have no effect on either a project's cash flows or its net present value.

Question 30

Which one of these criticisms applies to net present value analysis?

A)Net present value is too nearsighted.
B)Net present value analysis cannot be integrated with sensitivity analysis.
C)Real options cannot be included in net present value analysis.
D)Managers may acquire a false sense of security based on a project's net present value.
E)Net present value analysis cannot be integrated with scenario analysis.

Question 31

Les is concerned that his variable cost per unit projection for a project may not be reliable.Which type of analysis will best help him determine the effect that an incorrect variable cost estimate could have on the final outcome of the project?

A)Net income breakeven analysis
B)Financial breakeven analysis
C)Sensitivity analysis
D)Contribution margin analysis
E)Scenario analysis

Question 32

Which type of analysis is most dependent upon the use of a computer?

A)Financial breakeven analysis
B)Monte Carlo simulation
C)Sensitivity analysis
D)Accounting profit breakeven analysis
E)Scenario analysis

Question 33

In financial breakeven,the EAC is used to

A)allocate depreciation over the life of a project.
B)determine the tax benefit of depreciation.
C)allocate the initial investment over the life of a project.
D)determine the ideal contribution margin.
E)ascertain the appropriate discount rate.

Question 34

Last month,you introduced a new product to the market.Consumer demand has been overwhelming,and it appears that strong demand will exist over the long-term.Given this situation,management should consider the option to

A)suspend.
B)contract.
C)withdraw.
D)abandon.
E)expand.

Question 35

The option to wait:
I.may have minimal value if a project relates to a rapidly changing technology.
II.is partially dependent upon the discount rate applied to the project being evaluated.
III.could have a negative value.
IV.is valued based on a project's EAC.

A)I and III only
B)II and IV only
C)I and II only
D)II,III,and IV only
E)I,II,and III only

Question 36

Financial breakeven analysis is superior to accounting profit breakeven analysis because it

A)is easier to compute.
B)considers fixed costs while the accounting profit breakeven does not.
C)uses straight-line depreciation rather than the MACRS method.
D)considers the economic opportunity costs of the initial investment.
E)considers the contribution margin while the accounting profit breakeven does not.

Question 37

Real options are options that

A)apply only to projects that are classified as high risk.
B)apply only to projects involving vacant land.
C)rarely are used in actual practice.
D)describe actions that can be taken once a project has commenced.
E)are guaranteed to increase a project's value if implemented within the first year of the project.

Question 38

Recently,DB Miller & Co.implemented a positive NPV project.The project has a projected life of 4 years and an estimated rate of return of 14 percent.The project can be expanded by simply incurring additional variable costs or shut down without incurring any penalties or additional costs.Today,the government ruled that projects of this type are now subject to a new per unit tax,the total cost of which will exceed the projected NPV.The most logical move for the company would be to

A)continue the project as planned since the NPV was positive and the project has been implemented.
B)suspend the project until the following year to allow the company time to absorb the additional cost.
C)double the size of the project as soon as it is feasible to do so.
D)end the project immediately unless the additional tax can be passed on to Miller & Co.customers.
E)decrease the required return on the project so the NPV can remain positive given the additional cost.

Question 39

Which one of the following statements is correct regarding the financial breakeven point of a project?

A)The present value of the cash inflows exceeds the amount of the initial investment.
B)The payback period of the project is equal to the life of the project.
C)The operating cash flow is at a level that produces a net present value of zero.
D)The project never pays back on a discounted basis.
E)The IRR of the project exceeds the required rate of return.

Question 40

Which one of these would increase the value of a single-family housing development project if that development were delayed?

A)Decrease in demand for housing
B)Increase in unemployment
C)Decrease in property taxes
D)Increase in building costs
E)Increase in insurance costs

Question 41

A project has earnings before interest and taxes of $7,318,fixed costs of $13,480,a selling price of $14 a unit,and a sales quantity of 7,500 units.Depreciation is $2,200.What is the variable cost per unit?

A)$10.56
B)$12.08
C)$8.87
D)$10.93
E)$11.24

Question 42

Ernestine is analyzing a 4-year project with an initial cost of $87,000,a required rate of return of 14 percent,and a chance of success of 4 percent.If the project succeeds,the annual cash flow will be $1,789,000.If the project fails,the annual cash flow will be -$131,000.The project can be shut down after the first 2 years but all monies invested will be lost.None of the initial cost can be recouped after 4 years.What is the net present value of this project at Time 0?

A)$150,050.32
B)-$49,666.71
C)-$238,212.04
D)-$85,578.77
E)$59,412.95

Question 43

New Foods is analyzing a proposed project with expected sales of 8,700 units,±4 percent.The expected variable cost per unit is $26 and the expected fixed costs are $49,000.Cost estimates are considered accurate within a range of ±1 percent.The depreciation expense is $18,300.The sale price is estimated at $52 a unit,±3 percent.If the company conducts a sensitivity analysis using a variable cost of $28,what will be the total variable cost estimate?

A)$233,856
B)$253,344
C)$253,625
D)$243,600
E)$248,060

Question 44

The project defined by the following decision tree has a required discount rate of 14 percent.

What is the Time 1 net present value of a successful investment?

A)$89,406,415
B)$92,305,012
C)$87,342,087
D)$122,008,054
E)$126,583,344

Question 45

A project has estimated sales of 11,500 units,±2 percent.The expected variable cost per unit is $13,and the expected fixed costs are $29,000.The fixed and variable cost estimates are considered accurate within a range of ±3 percent.The sales price is estimated at $29 a unit,±1 percent.What is the contribution margin for a sensitivity analysis using a fixed cost of $30,000?

A)$13
B)$14
C)$15
D)$16
E)$17

Question 46

At a production level of 5,150 units,a project has total cash costs of $130,789.The variable cost per unit is $11.07,and the depreciation is $8,600.What is the amount of the total fixed costs?

A)$65,178.50
B)$78,992.11
C)$56,204.09
D)$73,778.50
E)$68,626.67

Question 47

The Garden Mart is analyzing a proposed 3-year project.Expected sales are 16,000 units,±6 percent.The expected variable cost per unit is $4,and the expected fixed costs are $16,000.The fixed and variable cost estimates have a range of ±1 percent.The sales price is estimated at $15 a unit,±3 percent.The project requires an initial investment of $41,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $12,000 at the end of the project.The project requires $5,600 in net working capital.The discount rate is 16 percent,and the tax rate is 35 percent.What is the operating cash flow under the optimistic case scenario?

A)$120,063.17
B)$118,542.27
C)$121,153.09
D)$122,694.40
E)$117,947.60

Question 48

Nu-Tek is analyzing a proposed project with expected sales of 5,800 units,±6 percent.The expected variable cost per unit is $11 and the expected fixed costs are $15,600.Cost estimates are considered accurate within a range of ±4 percent.The depreciation expense is $5,700.The sale price is estimated at $21 a unit,±1 percent.What is the sales revenue under the pessimistic case scenario?

A)$120,582.00
B)$116,120.21
C)$113,347.08
D)$108,110.00
E)$114,492.00

Question 49

William's Co.is considering spending $29,000 at Time 0 to test a new product.Depending on the test results,the firm may decide to spend $64,000 at Time 1 to start production.If the product is introduced and it is successful,it will produce after-tax cash flows of $48,000 a year for Years 2 through 4.If it is unsuccessful,there will be no cash flow in Year 1,after which the project will be terminated.There are no recovery costs at the end of Year 4.The probability of a successful test and investment is 58 percent.What is the net present value at Time 0 given a discount rate of 16 percent?

A)$5,881.15
B)$8,407.70
C)-$7,098.65
D)$1,133.15
E)-$3,594.43

Question 50

At a production level of 7,500 units,a project has earnings before interest and taxes of $48,310.Depreciation is $9,700,and fixed costs are $12,200.What is the variable cost per unit if the sales price per unit is $29.50?

A)$21.43
B)$24.07
C)$17.76
D)$18.92
E)$20.14

Question 51

Green Gardens is analyzing a proposed 5-year project that requires an investment of $77,000 in fixed assets and $17,400 in net working capital.The company uses straight-line depreciation over a project's life.Sales are estimated at 24,000 units ±3 percent.The expected variable cost per unit is $17,and the expected fixed costs are $39,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $36 a unit,±1 percent.The discount rate is 16 percent,and the tax rate is 35 percent.What is the net income under the pessimistic case scenario?

A)$241,048.60
B)$232,009.48
C)$244,517.20
D)$220,001.32
E)$248,519.70

Question 52

A project requires an initial investment of $69,000 for equipment that will be depreciated using the straight-line method to zero over the project's 4-year life.The equipment can be sold for $15,000 at the end of the project.The project requires $8,700 in net working capital.The company expects to sell 31,000 units,±5 percent.The expected variable cost per unit is $12,and the expected fixed costs are $46,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $19 a unit,±2 percent.The discount rate is 14 percent,and the tax rate is 34 percent.What is the operating cash flow for a sensitivity analysis using total fixed costs of $45,000?

A)$124,520
B)$116,520
C)$122,000
D)$119,385
E)$132,033

Question 53

A 6-year project has expected sales of 2,000 units,±4 percent.The expected variable cost per unit is $8,and the expected fixed costs are $9,800.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $22 a unit,±3 percent.The project requires an initial investment of $42,000 for equipment that will be depreciated straight-line to zero over the project's life.The equipment has a pretax salvage value of $5,000 at the end of the project.The project requires $2,600 in net working capital during its life.The discount rate is 9 percent,and tax rate is 30 percent.What is the net present value for the optimistic scenario?

A)$35,096.52
B)$34,008.12
C)$28,008.46
D)$31,490.07
E)$22,295.33

Question 54

Appalachian Crafts is analyzing a project with expected sales of 18,900 units,±2 percent.The expected variable cost per unit is $23 and the expected fixed costs are $52,000.Cost estimates are considered accurate within a range of ±1 percent.The depreciation expense is $18,400.The sale price is estimated at $54 a unit,±2 percent.What is the total dollar difference between the revenue using the optimistic sale price versus the expected sale price?

A)$24,600
B)$16,800
C)$20,412
D)$17,894
E)$22,200

Question 55

DK Markets expects a new project to produce sales of 9,600 units,±8 percent.The expected variable cost per unit is $17 and the expected fixed costs are $47,000.Cost estimates are considered accurate within a range of ±3 percent.The depreciation expense is $24,600.The sale price is estimated at $39 a unit,±2 percent.What is the amount of the fixed cost per unit under the pessimistic case scenario?

A)$5.16
B)$4.40
C)$3.19
D)$4.02
E)$5.48

Question 56

The Meat Mart has computed its fixed costs to be $.38 per pound given an average daily sales level of 500 pounds.It charges $5.59 a pound for top-grade ground beef.The variable cost per pound is $2.64.The tax rate is 34 percent.The accounting profit breakeven point is 211.5 pounds per day.What is the amount of the depreciation expense?

A)$266.67
B)$433.93
C)$384.01
D)$128.09
E)$233.33

Question 57

Mercier's is analyzing a proposed 4-year project with expected sales of 26,500 units,±3 percent.The expected variable cost per unit is $10,and the expected fixed costs are $42,000.The fixed and variable cost estimates are considered accurate within a range of ±2 percent.The sales price is estimated at $19 a unit,±2 percent.The project requires an initial investment of $74,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $20,000 at the end of the project.The project requires $11,200 in net working capital.The discount rate is 14 percent,and the tax rate is 35 percent.What is the earnings before interest and taxes estimate under the expected case scenario?

A)$178,000
B)$204,000
C)$136,000
D)$248,000
E)$154,000

Question 58

Roy is analyzing a 5-year project with an initial cost of $210,000,a required return of 16 percent,and a probability of success of 62 percent.If the project fails,it will generate an annual after-tax cash flow of -$48,500.If the project succeeds,the annual after-tax cash flow will be $79,000.He has further determined that if the project fails,he will shut it down after the first year and lose all of his original investment.If,however,the project is a success,he can expand it with no additional investment and increase the after-tax cash flow to $154,000 a year for Years 2-5.At the end of Year 5,the project would be terminated and have no salvage value.What is the net present value of this project at Time 0?

A)$46,655.42
B)$32,560.35
C)$47,297.19
D)$62,543.35
E)$59,297.19

Question 59

The estimates for a project include a sales quantity of 22,300 units,±4 percent,variable costs per unit of $8,and fixed costs of $127,800.Cost estimates are considered accurate within a range of ±3 percent.The depreciation expense is $48,000.The sale price is estimated at $19 a unit,±6 percent.The company is conducting a sensitivity analysis on the sale price using a sale price estimate of $18.Using this value,what will be the earnings before interest and taxes?

A)$50,500
B)$46,000
C)$52,500
D)$47,200
E)$48,500

Question 60

The project defined by the following decision tree has a required discount rate of 17 percent.

What is the Time 0 net present value of a successful test and investment?

A)$21,565,903
B)$26,997,143
C)$32,288,788
D)$16,997,143
E)$42,997,143

Question 61

Wilson's Antiques is considering a project that has an initial cost today of $14,000.The project has a life of 2 years with cash inflows of $9,500 a year.Should Wilson's decide to wait 2 years to commence this project,the initial cost will increase by 3 percent and the cash inflows will increase to $11,000 a year.What is the value of the option to wait if the applicable discount rate is 12 percent?

A)$1,269.26
B)$1,335.54
C)$2,115.08
D)$1,606.76
E)$1,935.54

Question 62

A project has an accounting breakeven point of 3,800 units.The fixed costs are $3,208,and the projected variable cost per unit is $16.42.The project requires an initial investment in fixed assets of $840 that will be depreciated straight-line to zero over the 4-year life of the project.What is the projected sales price given a zero tax rate?

A)$14.67
B)$21.08
C)$16.82
D)$20.08
E)$17.32

Question 63

Rizzo's is considering a project with a life of 5 years and an initial cost of $131,000.The discount rate for the project is 14 percent.The firm expects to sell 2,100 units a year.The cash flow per unit is $23.The firm will have the option to abandon this project after 3 years at which time it expects it could sell the project for $49,000.At what level of sales should the firm be willing to abandon this project?

A)1,087 units
B)1,294 units
C)1,479 units
D)1,619 units
E)1,502 units

Question 64

Arvin's is analyzing a project with an initial cost of $212,000 that would be depreciated straight-line to zero over the project's 3-year life.Estimates include fixed costs of $48,280,variable costs per unit of $13.12,and a selling price of $26.50 per unit.The discount rate is set at 16 percent with a tax rate of 35 percent.What is the financial breakeven point?

A)10,749 units
B)13,067 units
C)11,618 units
D)10,117 units
E)11,199 units

Question 65

ELK,Inc.has compiled this information for a proposed project: sales price = $89 ±3 percent; fixed costs = $21,800 ±1 percent; variable cost per unit = $42.90 ±3 percent; sales quantity = 1,500 units ±5 percent; tax rate = 34 percent; initial investment in fixed assets = $36,500; depreciation method = straight-line to a zero book value over the project's life; project life = 4 years; salvage value of fixed assets = $0; net working capital requirement = $4,800,which will be recouped at the end of the project; discount rate = 12 percent.What is the project's net present value for the pessimistic scenario?

A)$40,661.08
B)$47,422.30
C)$45,899.21
D)$44,371.15
E)$52,222.12

Question 66

A proposed project has fixed costs of $159,800,depreciation expense of $47,920,and a sales quantity of 6,750 units.Ignore taxes.What is the contribution margin if the projected level of sales is the accounting breakeven point?

A)$33.29
B)$30.77
C)$27.18
D)$34.36
E)$32.00

Question 67

A project has a contribution margin of $13.27,projected fixed costs of $78,900,projected variable cost per unit of $9,and a projected financial breakeven point of 16,230 units.The depreciation expense is $36,200,and the tax rate is 35 percent.What is the operating cash flow at this level of output?

A)$65,176.87
B)$103,038.10
C)$112,500.00
D)$101,376.87
E)$122,320.50

Question 68

You are considering a project that has been assigned a discount rate of 12 percent.If you start the project today,you will incur an initial cost of $280 and will receive cash inflows of $350 a year for 3 years.If you wait 1 year to start the project,the initial cost will rise to $420 and the cash flows will increase to $385 a year for 3 years.What is the value of the option to wait?

A)-$110.01
B)-$55.93
C)$18.67
D)-$20.20
E)$20.20

Question 69

Assume a project has estimated fixed costs of $61,200,variable costs per unit of $84.29,a selling price of $199,and an initial cost of $402,000 for fixed assets.Depreciation is straight-line to zero over the project's 4-year life.The tax rate is 30 percent,and the discount rate is 12 percent.What is the financial breakeven point?

A)1,422 units
B)1,806 units
C)1,366 units
D)1,698 units
E)1,228 units

Question 70

Rita's Flowers is considering a 3-year project with a discount rate of 12 percent,a tax rate of 34 percent,and an initial cost of $12,000 for fixed assets.The selling price is estimated at $22 a unit based on variable costs per unit of $6.20 and fixed costs of $2,280.Depreciation is straight-line to zero over 3 years.What is the accounting breakeven point?

A)262 units
B)301 units
C)492 units
D)397 units
E)406 units

Question 71

The Short Stack expects to sell 8,000 units,±2 percent.The expected variable cost per unit is $8,±3 percent,and the expected fixed costs are $20,000,±1 percent.The depreciation expense is $6,000.The sale price is estimated at $23 a unit,±2 percent.What is the sales revenue under the optimistic case scenario?

A)$187,680.00
B)$83,760.33
C)$88,000.61
D)$197,335.20
E)$191,433.60

Question 72

Rosita's is considering a project with a discount rate of 9 percent.If the firm starts the project today,it will incur an initial cost of $32,260 and will receive cash inflows of $18,320 a year for 4 years.If the firm waits 1 year to start the project,the initial cost will decrease to $30,500,the cash flows will increase to $18,640 a year for 4 years,and the discount rate will decrease to 8.5 percent.What is the value of the option to wait?

A)$848.29
B)$1,471.42
C)$1,489.20
D)$681.04
E)$1,071.58

Question 73

You are considering a new project with depreciation of $974,fixed costs of 11,580,and a sales price of $14.99.The variable cost per unit is $6.92.Ignore taxes.What is the accounting breakeven level of production?

A)1,555.64 units
B)933.33 units
C)1,292.02 units
D)1,592.91 units
E)910.00 units

Question 74

The Tall Stack expects to sell 3,000 units,±10 percent.The expected variable cost per unit is $7,±3 percent,and the expected fixed costs are $13,700,±1 percent.The depreciation expense is $6,870.The sale price is estimated at $16 a unit,±2 percent.The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $15.What will be the earnings before interest and taxes?

A)$6,430
B)$10,300
C)$4,300
D)$3,430
E)$13,130

Question 75

The accounting breakeven production quantity for a project is 7,209 units.The fixed costs are $34,780,and the contribution margin is $11.Assume a zero tax rate.What is the projected depreciation expense?

A)$43,600
B)$45,050
C)$44,519
D)$47,053
E)$47,143

Question 76

Denver Mart is considering a project with a life of 5 years and an initial cost of $136,000.The discount rate is 11 percent.The firm expects to sell 2,200 units a year with a cash flow per unit of $26.The firm will have the option to abandon this project after 3 years at which time it expects it could sell the project for $48,000.The firm is interested in knowing how the project will perform if the sales forecast for Years 4 and 5 of the project are revised such that there is a probability of 50 percent that the sales will be 1,000 units and a probability of 50 percent they will be 2,500 units a year.What is the net present value of this project given your sales forecasts?

A)$23,617
B)-$43,719
C)$55,002
D)$6,877
E)$62,025

Question 77

Kurt's Coffees has a new hot drink in mind that is expected to generate sales of 24,000 units over its 2-year life.The initial cost for equipment is $69,500.This equipment will be depreciated straight-line to zero over 2 years and have no salvage value.The fixed costs are $17,800,and the contribution margin is $2.20.The tax rate is 35 percent,and the discount rate is 14 percent.Should this new drink be pursued? Why or why not?

A)Yes; because the financial breakeven quantity of 19,014 units is less than expected sales
B)Yes; because the financial breakeven quantity of 18,648 units is less than expected sales
C)Yes; because the financial breakeven quantity of 29,101 units exceeds the expected sales
D)No; because the financial breakeven quantity of 19,014 units is less than expected sales
E)No; because the financial breakeven quantity of 29,101 units exceeds the expected sales

Question 78

Isabelle is reviewing a project with projected sales of 1,500 units a year,a cash flow of $38 a unit,and a project life of 4 years.The initial cost of the project is $87,000.The relevant discount rate is 12 percent.She has the option to abandon the project after 1 year at which time she feels she could sell the project for $50,000.At what level of sales should she be willing to abandon the project?

A)713 units
B)483 units
C)967 units
D)548 units
E)607 units

Question 79

Miller Tools is considering a new project that requires an initial investment of $81,300 for fixed assets,which will be depreciated straight-line to zero over the project's 3-year life.The project is expected to have fixed costs of $37,600 a year,and a contribution margin of $18.40.The tax rate is 34 percent and the discount rate is 15 percent.What is the financial breakeven point?

A)2,950 units
B)4,217 units
C)2,200 units
D)2,483 units
E)3,667 units

Question 80

Mosler Company is considering a project requiring an initial investment of $229,700,fixed costs of $71,900,variable costs of $5.07 per unit,a selling price of $13.07 per unit,and a life of 4 years.The discount rate is 14 percent,and the tax rate is 30 percent.Depreciation is straight-line to zero over the project's life.What is the accounting breakeven point?

A)15,008 units
B)13,200 units
C)16,166 units
D)11,302 units
E)17,352 units