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

Question 1

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.

Answer 1

Each variable in sensitivity analysis is treated in isolation.

Question 2

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 six 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.

Answer 2

The contribution margin for the project is expected to improve next year.

Question 3

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

A)Net present value is too near-sighted.
B)Net present value analysis cannot be integrated with Monte Carlo simulation.
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.

Answer 3

Managers may acquire a false sense of security based on a project's net present value.

Question 4

In scenario analysis,the base 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 break-even point.
D)a firm's best guess of a future outcome.
E)based on a firm's historical average sales and costs.

Question 5

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

A)Operational break-even
B)Financial break-even
C)Accounting profit break-even
D)Cash break-even
E)Present value break-even

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 costs
D)Initial cost
E)Sales quantity

Question 7

Which one of these is an analysis of the relationship between the sales volume and net present value?

A)Financial break-even analysis
B)Monte Carlo simulation
C)Forecasting analysis
D)Forecasting simulation
E)Accounting profit break-even analysis

Question 8

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.

Question 9

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 for capital projects under conditions of hard rationing.

Question 10

Which one of these occurs at the financial break-even 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 11

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 12

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 13

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 break even on an accounting profit basis.
C)should still be accepted if its projected sales quantity is less than the financial break-even point.
D)should be permanently rejected.
E)will always have a higher (less negative)net present value at a later time.

Question 14

The financial break-even 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 15

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 break-even
D)Financial break-even
E)Cash flow break-even

Question 16

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 base case.
E)comparing actual values to projected values to determine which variable had the greatest variation.

Question 17

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 18

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 19

Which one of these combines scenario analysis with sensitivity analysis?

A)Financial break-even analysis
B)Monte Carlo simulation
C)Internal rate of return analysis
D)Profitability index analysis
E)Accounting profit break-even analysis

Question 20

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 21

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 sales price minus 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 22

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.

Question 23

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 24

Which method best attempts to model all of the uncertainties of the real world?

A)Scenario analysis
B)Financial break-even analysis
C)Accounting break-even analysis
D)Sensitivity analysis
E)Monte Carlo simulation

Question 25

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

A)external break-even point.
B)accounting profit break-even point.
C)internal break-even point.
D)financial break-even point.
E)contribution margin break-even point.

Question 26

Which one of the following statements is correct regarding the financial break-even 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 27

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 28

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 know with certainty.

Question 29

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 30

Fixed production costs are:

A)directly related to labor costs.
B)measured 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 31

In financial break-even,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 32

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 break-even point decreases.

Question 33

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.

Question 34

Financial break-even analysis is superior to accounting profit break-even analysis because it:

A)is easier to compute.
B)considers fixed costs while the accounting profit break-even does not.
C)utilizes Monte Carlo simulation.
D)considers the economic opportunity costs of the initial investment.
E)considers the contribution margin while the accounting profit break-even does not.

Question 35

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

A)Monte Carlo simulation
B)Financial break-even analysis
C)Sensitivity analysis
D)Contribution margin analysis
E)Scenario analysis

Question 36

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

A)Financial break-even analysis
B)Monte Carlo simulation
C)Sensitivity analysis
D)Accounting profit break-even analysis
E)Scenario analysis

Question 37

Which one of these statements is correct?

A)Monte Carlo simulations are now used by the vast majority of firms.
B)Including the option to wait into the analysis will increase the net present value of any project.
C)Financial managers prefer accounting profit break-even analysis over financial break-even analysis.
D)The option to expand may increase,decrease,or not affect the final net present value of a project.
E)Monte Carlo simulation may not be worthwhile for small dollar,low-risk projects.

Question 38

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 39

Ignoring taxes,which one of these is the correct formula for the accounting profit break-even 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 40

All else constant,the accounting profit break-even 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 41

A project has earnings before interest and taxes of $6,355,fixed costs of $11,600,a selling price of $12 a unit,and a sales quantity of 10,500 units.Depreciation is $2,200.What is the variable cost per unit?

A)$10.56
B)$7.08
C)$8.87
D)$10.08
E)$8.24

Question 42

The Meat Mart has computed its fixed costs to be $.63 per pound given an average daily sales level of 500 pounds.It charges $3.79 a pound for top-grade ground beef.The variable cost per pound is $2.99.The tax rate is 35 percent.The accounting profit break-even point is 487.5 pounds.What is the amount of the depreciation expense?

A)$67
B)$75
C)$90
D)$82
E)$86

Question 43

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)$40,661.77
B)$47,422.30
C)$45,899.20
D)$44,371.81
E)$52,222.30

Question 44

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $18.Using this value,the earnings before interest and taxes will be:

A)$10,500
B)$6,000
C)$2,500
D)$5,500
E)$8,500

Question 45

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
What is the amount of the fixed cost per unit under the pessimistic case scenario?

A)$2.55
B)$3.00
C)$3.15
D)$4.02
E)$4.55

Question 46

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the net present value for the optimistic scenario?

A)$59,599.73
B)$54,008.12
C)$51,410.39
D)$67,038.87
E)$69,295.33

Question 47

You are considering a new project.The project has projected depreciation of $820,fixed costs of $5,000,and a sales price of $13.49.The variable cost per unit is $6.44.Ignore taxes.What is the accounting break-even level of production?

A)825.53 units
B)933.33 units
C)292.02 units
D)592.91 units
E)910.00 units

Question 48

A project has an accounting break-even point of 2,239 units.The fixed costs are $4,200 and the projected variable cost per unit is $23.30.The project requires an initial investment in fixed assets of $1,200 that will be depreciated straight-line to zero over the 4-year life of the project.What is the projected sales price?

A)$24.67
B)$21.08
C)$24.82
D)$25.08
E)$25.31

Question 49

At a production level of 4,800 units a project has total cash costs of $102,600.The variable cost per unit is $11.46 and depreciation is $8,600.What is the amount of the total fixed costs?

A)$94,000
B)$38,992
C)$56,200
D)$47,592
E)$68,626

Question 50

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000?

A)$14,520
B)$16,520
C)$22,000
D)$44,520
E)$52,000

Question 51

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the operating cash flow under the optimistic case scenario?

A)$48,007.87
B)$80,542.27
C)$54,748.42
D)$52,694.40
E)$67,947.60

Question 52

At a production level of 6,500 units a project has earnings before interest and taxes of $67,385.Depreciation is $10,300 and fixed costs are $41,200.What is the variable cost per unit if the sales price per unit is $34.50?

A)$19.38
B)$14.07
C)$17.76
D)$18.92
E)$16.21

Question 53

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the contribution margin for a sensitivity analysis using a variable cost per unit of $8?

A)$3
B)$4
C)$5
D)$6
E)$7

Question 54

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the earnings before interest and taxes estimate under the expected case scenario?

A)$18,000
B)$24,000
C)$36,000
D)$48,000
E)$54,000

Question 55

Mercier's is analyzing a proposed 3-year project using standard sensitivity analysis.The company expects to sell 12,000 units,±4 percent.The expected variable cost per unit is $7 and the expected fixed costs are $36,000.The fixed and variable cost estimates are considered accurate within a ±6 percent range.The sales price is estimated at $14 a unit,±5 percent.The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project's life.The equipment can be sold for $39,000 at the end of the project.The project requires $11,200 in net working capital for the three years.The discount rate is 11 percent and tax rate is 34 percent
What is the net income under the pessimistic case scenario?

A)-$566.02
B)-$422.40
C)-$278.78
D)$3,554.50
E)$5,385.60

Question 56

The accounting break-even production quantity for a project is 6,425 units.The fixed costs are $51,600 and the contribution margin is $9.What is the projected depreciation expense?

A)$3,600
B)$5,050
C)$6,225
D)$7,053
E)$7,143

Question 57

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
What is the sales revenue under the pessimistic case scenario?

A)$97,020.00
B)$73,120.00
C)$86,347.80
D)$88,110.00
E)$107,692.20

Question 58

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
What is management's best guess of the contribution margin value?

A)$2.67
B)$10.33
C)$9.00
D)$7.00
E)$8.72

Question 59

A proposed project has fixed costs of $213,800,depreciation expense of $91,500,and a sales quantity of 4,500 units.Ignore taxes.What is the contribution margin if the projected level of sales is the accounting break-even point?

A)$73.29
B)$67.84
C)$27.18
D)$34.36
E)$52.00

Question 60

Southern Goods is analyzing a proposed project using standard sensitivity analysis.The company expects to sell 4,500 units,±11 percent.The expected variable cost per unit is $13 and the expected fixed costs are $12,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $5,000.The sale price is estimated at $22 a unit,±2 percent.
If the company conducts a sensitivity analysis using a variable cost of $12,what will the total variable cost estimate be?

A)$59,940
B)$53,500
C)$53,625
D)$54,000
E)$48,060

Question 61

A project has a contribution margin of $4.50,projected fixed costs of $12,500,projected variable cost per unit of $12,and a projected financial break-even point of 5,750 units.The depreciation expense is $6,200 and the tax rate is 34 percent.What is the operating cash flow at this level of output?

A)$37,290.00
B)$3,038.10
C)$12,500.00
D)$10,935.50
E)$22,320.50

Question 62

Rosita's is considering a project that has been assigned a discount rate of 12 percent.If the firm starts the project today,it will incur an initial cost of $38,260 and will receive cash inflows of $18,320 a year for three years.If the firm waits one year to start the project,the initial cost will rise to $40,500 and the cash flows will increase to $18,640 a year for three years.What is the value of the option to wait?

A)$848.29
B)-$1,471.42
C)$489.20
D)-$681.04
E)-$1,928.93

Question 63

The Short Stack expects to sell 5,000 units,±5 percent.The expected variable cost per unit is $8 and the expected fixed costs are $20,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $6,000.The sale price is estimated at $18 a unit,±3 percent.
The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $20.What will the earnings before interest and taxes be?

A)$12,000
B)$18,000
C)$25,000
D)$34,000
E)$36,000

Question 64

Denver Mart is considering a project with a 5-year life and an initial cost of $120,000.The discount rate is 12 percent.The firm expects to sell 2,100 units a year with a cash flow per unit of $20.The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $50,000.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 50 percent chance that the sales will be 1,400 units and a 50 percent chance 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)$23,719
C)$25,002
D)$26,877
E)$28,745

Question 65

You are considering a project that has been assigned a discount rate of 8 percent.If you start the project today,you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years.If you wait one year to start the project,the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years.What is the value of the option to wait?

A)$15.23
B)$17.08
C)$18.67
D)$20.20
E)$50.20

Question 66

You have compiled the following information for a proposed expansion project.
Initial investment: $349,000
Fixed costs: $57,700
Variable costs: $112.64 per unit
Selling price: $224.90 per unit
Discount rate: 11 percent
Project life: 3 years
Tax rate: 35 percent

A)1,368.02 units
B)1,913.19 units
C)1,366.16 units
D)798.31 units
E)1,228.17 units

Question 67

Ruzzo's is considering a project with a 5-year life and an initial cost of $120,000.The discount rate for the project is 12 percent.The firm expects to sell 2,100 units a year.The cash flow per unit is $20.The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $45,000.At what level of sales should the firm be willing to abandon this project?

A)1,087.15 units
B)1,331.32 units
C)1,479.92 units
D)1,618.87 units
E)2,500.00 units

Question 68

Isabelle is reviewing a project with projected sales of 1,500 units a year,a cash flow of $40 a unit and a 3-year project life.The initial cost of the project is $95,000.The relevant discount rate is 15 percent.She has the option to abandon the project after one year at which time she feels she could sell the project for $60,000.At what level of sales should she be willing to abandon the project?

A)1,725.00 units
B)1,882.01 units
C)966.67 units
D)922.67 units
E)1,006.34 units

Question 69

Arvin's has compiled this information related to a new project:
Initial investment: $212,000
Fixed costs $48,280
Variable costs: $13.12 per unit
Selling price: $26.50 per unit
Discount rate: 15 percent
Project life: 4 years
Tax rate: 34 percent
Fixed assets are depreciated using straight-line depreciation over the project's life.What is the financial break-even point?

A)9,204.88 units
B)6,824.02 units
C)9,976.56 units
D)7,117.58 units
E)11,198.75 units

Question 70

Wilson's Antiques is considering a project that has an initial cost today of $10,000.The project has a 2-year life with cash inflows of $6,500 a year.Should Wilson's decide to wait two years to commence this project,the initial cost will increase by 5 percent and the cash inflows will increase to $7,500 a year.What is the value of the option to wait if the applicable discount rate is 10 percent?

A)$798.79
B)$1,235.54
C)$1,509.28
D)$1,606.76
E)$935.54

Question 71

The project defined by the following decision tree has a required discount rate of 15 percent.
What is the Time 0 net present value of a successful test and investment?

A)$26,136,646
B)$12,997,143
C)$109,091,919
D)$78,258,385
E)$112,997,143

Question 72

The project defined by the following decision tree has a required discount rate of 15 percent.
What is the Time 1 net present value of a successful investment?

A)$112,997,143
B)$88,428,572
C)$87,342,087
D)$122,008,054
E)$211,046,198

Question 73

Roy is analyzing a project and has determined that the initial cost will be $98,000 and the required rate of return needs to be 14 percent.The project has a 55 percent chance of success and a 45 percent chance of failure.If the project fails,it will generate an annual aftertax cash flow of $12,000.If the project succeeds,the annual aftertax cash flow will be $54,000.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 aftertax cash flow to $137,000 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)$125,375.63
B)$112,560.35
C)$77,297.19
D)$84,560.35
E)$89,297.19

Question 74

Ernst is analyzing a project and has determined that the initial cost will be $423,000 and the required rate of return needs to be 16 percent.The project has a 2 percent chance of success and a 98 percent chance of failure.If the project fails,it will generate an annual cash flow of -$131,000.If the project succeeds,the annual cash flow will be $789,000.He has further determined that if the project is a failure,he can shut it down after the first two years but will not be able to recover any of his investment.If however,the project is a success,he can expand it after the second year with no additional investment and increase the cash flow to $1,020,000 a year for Years 3 and 4.At the end of Year 4,the project would be terminated and have no salvage value.What is the net present value of this project at Time 0?

A)$1,850,050.32
B)$49,666.71
C)-$238,212.04
D)$898,003.01
E)-$579,412.95

Question 75

William's Co.is considering spending $15,000 at Time 0 to test a new product.Depending on the test results,the firm may decide to spend $58,000 at Time 1 to start production of the product.If the product is introduced and it is successful,it will produce aftertax cash flows of $45,000 a year for Years 2 through 4.The probability of successful test and investment is 62 percent.What is the net present value at Time 0 given a 14 percent discount rate?

A)$9,881.15
B)$8,407.70
C)$10,275.03
D)$11,133.15
E)$10,406.67

Question 76

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 two 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 break-even quantity of 19,013.51 units is less than expected sales
B)Yes;because the financial break-even quantity of 18,648.20 units is less than expected sales
C)Yes;because the financial break-even quantity of 29,100.80 units is more than expected sales
D)No;because the financial break-even quantity of 19,013.51 units is less than expected sales
E)No;because the financial break-even quantity of 29,100.80 units is more than expected sales

Question 77

The Short Stack expects to sell 5,000 units,±5 percent.The expected variable cost per unit is $8 and the expected fixed costs are $20,000.Cost estimates are considered accurate within a ± 5 percent range.The depreciation expense is $6,000.The sale price is estimated at $18 a unit,±3 percent.
What is the sales revenue under the optimistic case scenario?

A)$75,000
B)$83,760
C)$88,000
D)$97,335
E)$108,985

Question 78

Rita's Flowers has gathered this information on a project:
Initial investment: $12,000
Fixed costs $2,280
Variable costs: $6.20 per unit
Selling price: $22 per unit
Discount rate: 12 percent
Project life: 3 years
Tax rate: 34 percent
Fixed assets are depreciated using straight-line depreciation over the project's life.What is the accounting break-even point?

A)262.33 units
B)301.31 units
C)491.79 units
D)397.47 units
E)406.18 units

Question 79

Mosler Company has compiled this information for a new project:
Initial investment: $229,700
Fixed costs: $66,800
Variable costs: $5.07 per unit
Selling price: $12.99 per unit
Discount rate: 14 percent
Project life: 4 years
Tax rate: 34 percent
Depreciation is straight-line to zero over the project's life.What is the accounting break-even point?

A)12,388.60 units
B)13,200.00 units
C)15,684.97 units
D)11,301.82 units
E)10,352.08 units

Question 80

Miller Tools is considering a new project that requires an initial investment of $82,600 for fixed assets,which will be depreciated straight-line to zero over the project's 4-year life.The project is expected to have fixed costs of $41,200 a year and a contribution margin of $22.80.The tax rate is 34 percent and the discount rate is 10 percent.What is the financial break-even point?

A)2,949.91 units
B)3,072.10 units
C)2,200.01 units
D)2,483.33 units
E)2,666.67 units