Deck 12: Evaluating Project Economics

Question 1

Evaluate the following statement: If a project fails to break even from a pretax operating cash flow perspective, then the firm is going to put more cash into the project to keep it going.

Answer 1

True

Question 2

Operating leverage is a measure of the sensitivity of net income to changes in revenue.

Answer 2

False

Question 3

EBITDA is more sensitive to changes in revenue than EBIT.

Answer 3

False

Question 4

Evaluate the following statement: If The Tower of Pizza has a cash flow degree of operating leverage equal to 1.15, then a 20 percent increase in revenue should drive a 35 percent increase in pretax operating cash flow.

Question 5

Evaluate the following statement: Taxes do not enter into the equation for the degree of cash flow of operating leverage because both fixed costs and pretax operating cash flows are measured on a pretax basis.

Question 6

Depreciation and amortization can be considered a fixed cost of the firm for accounting break-even purposes.

Question 7

The pretax operating cash flow (EBITDA) break-even point is the number of units that have to be sold in order to cover fixed cash expenses.

Question 8

A project with a higher proportion of fixed costs will have cash flows and accounting profits that are more sensitive to changes in revenues than an otherwise identical project with a lower proportion of fixed costs.

Question 9

Evaluate the following statement: An increase in the proportion of a project's costs that are fixed will increase the degree of operating leverage for the project.

Question 10

A synonym for pretax operating cash flow is EBIT.

Question 11

Evaluate the following statement: A firm that has zero fixed costs will have a degree of cash flow operating leverage equal to one.

Question 12

Evaluate the following statement: Operating profits and operating cash flow describe the same item.

Question 13

Total variable costs for a firm do not vary directly with the number of units sold.

Question 14

Evaluate the following statement: If there is no uncertainty regarding costs, volatility in pretax operating cash flows and accounting operating profits will be driven entirely by changes in revenue and operating leverage.

Question 15

Distinguishing between fixed and variable costs will enable one to calculate the sensitivity of EBITDA to changes in revenue.

Question 16

The per-unit contribution margin is defined as the total sales price less its total variable cost.

Question 17

If a firm's degree of accounting operating leverage is 1.12, then a 10 percent increase in revenue should result in a 12.0 percent increase in EBIT.

Question 18

The degree of pretax cash flow operating leverage will change for different levels of revenue.

Question 19

Evaluate the following statement: Break-even analysis tells us how many units must be sold in order for a project to break even on a cash flow or an accounting basis.

Question 20

Evaluate the following statement: Tunemony Craft has a degree of accounting operating leverage of 1.2. If EBIT increases 24 percent, then the firm must have had a 20 percent increase in revenue if no other changes were involved.

Question 21

The accounting operating profit break-even points are smaller than the corresponding pretax operating cash flow break-even points for a project with positive costs.

Question 22

EBITDA stands for:

A) earnings before interest, taxes, and amortized depreciation.
B) earnings before interest, taxes, depreciation, and amortization.
C) earnings before interest and taxes.
D) earnings before interest, taxes, dividend, and accrued expenses.

Question 23

Sensitivity analysis involves examining the sensitivity of the output from an analysis, such as the NPV, to changes in individual assumptions.

Question 24

Compared to an identical project with a lower proportion of fixed costs, a project with a higher proportion of fixed costs will have:

A) a higher degree of sensitivity of EBITDA to a change in revenues.
B) a lower degree of sensitivity of EBITDA to a change in revenues.
C) no discernible difference of a change in sensitivity of EBITDA to a change in revenues.
D) a stable net income stream as a function of revenues.

Question 25

The economic break-even point focuses on the after-tax free cash flows associated with the project for its entire life.

Question 26

The NPV of a project will equal $0 when the present value of the annual FCFs from the project, PV (FCF), equals the present value of net nonrecurring investments.

Question 27

The economic break-even point focuses on the cash flows or profits from operations rather than after-tax free cash flows associated with the project.

Question 28

The degree of pretax cash flow operating leverage provides us with:

A) a measure of how sensitive pretax operating cash flows are to changes in revenue.
B) a measure of how sensitive accounting operating profits are to changes in revenue.
C) a measure of how sensitive NOPAT is to changes in tax rates.
D) a measure of how sensitive accounting operating profits are to changes in tax rates.

Question 29

Within a simulation analysis, the firm will need to come up with some distributional assumptions concerning the forecast inputs, such as the mean and variance of the sales forecast.

Question 30

Revenue minus variable and fixed costs is best described by:

A) EBIT.
B) EBITDA.
C) NOPAT.
D) EAT.

Question 31

The crossover level of unit sales can be calculated for any two alternatives that have the same level of operating leverage.

Question 32

The accounting operating profit (EBIT) break-even point tells us how many units must be sold to avoid an accounting operating loss.

Question 33

An economic break-even point is the number of units that must be sold each year during the life of the project so that the difference of present value of cash inflows and present value of cash outflows is one.

Question 34

The crossover level of unit sales is the level at which one fixed/variable cost combination of production will begin to generate higher levels of operating cash flows than another fixed/variable cost combination of production.

Question 35

Simulation analysis has the benefit of providing a pinpoint accurate forecast of a project's NPV.

Question 36

If a firm knows that a price change will have an effect on a number of other forecast variables, such as the sales forecast, then the firm might require scenario analysis rather than sensitivity analysis.

Question 37

The economic break-even point considers a single year rather than the entire life.

Question 38

An analysis in which a firm would like to know the effect of a price change on the NPV of a project, holding all other variables and forecasts constant, is one type of sensitivity analysis.

Question 39

Another name for EBITDA is:

A) pretax operating cash flow.
B) accounting operating cash flow.
C) net income before tax.
D) net income after tax.

Question 40

If a firm is planning to operate in an environment in which there will be a great deal of variability in the level of revenues, then the firm:

A) should structure its cost structure to have high fixed costs and higher total variable costs.
B) should structure its cost structure to have high fixed costs and consequently lower per unit variable costs.
C) should structure its cost structure to have low fixed costs and consequently higher per unit variable costs.
D) should leave the cost structure unchanged.

Question 41

If a firm were interested in knowing the effect of a single input change on the net present value of a project, then the firm would most likely want to perform:

A) a Monte Carlo simulation.
B) a scenario analysis.
C) a sensitivity analysis.
D) a break-even analysis.

Question 42

Ottomony is considering an all-in-one retail center where the NPV of the project has an expected value with a distribution that yields a standard deviation of $25 million. Ottomony came to this conclusion by analyzing the individual input distributions for the project. This analysis is called:

A) a sensitivity analysis.
B) a scenario analysis.
C) a simulation analysis.
D) a horizontal analysis.

Question 43

Depreciation and amortization are treated like fixed costs:

A) in the calculation of the degree of pretax cash flow operating leverage.
B) in the calculation of the degree of accounting operating leverage.
C) for cash flow purposes.
D) for computing dividend.

Question 44

If the degree of accounting operating leverage is 1.3 for a firm, then a 10 percent increase in revenue should drive a:

A) 12% increase in pretax operating cash flows.
B) 13% increase in EBIT.
C) 30% increase in EBIT.
D) 1.3% increase in pretax operating cash flows.

Question 45

If a firm wanted to find the effect of a change in the variable cost per unit of production on the net present value of a project, then the firm might perform:

A) a sensitivity analysis.
B) a scenario analysis.
C) a Monte Carlo simulation.
D) a cash flow simulation.

Question 46

Sancore Inc. decided to invest in a project costing $35,000. It is assumed that all of $8,000 working capital will be recovered at the end of the project, which is four years. The opportunity cost of capital is 10%. Compute the present value of net non-recurring investment of the project. (Do not round intermediate calculation. Round the final answer to the nearest dollar.)

A) $36,713
B) $45,657
C) $46,713
D) $35,657

Question 47

The difference between revenue and variable cost is called:

A) total contribution.
B) net profit.
C) EBIT.
D) EAT.

Question 48

Astroscope Tours finds that if it were to increase its price by 10 percent, it would have a 6 percent reduction in the NPV of its new 3-Hour Tour. Considering other things to be unchanged, Astroscope's analysis could be described as:

A) Monte Carlo simulation.
B) break-even analysis.
C) sensitivity analysis.
D) variance analysis.

Question 49

A firm is considering the effect of high inflation and low inflation environments on a project. In the high inflation environment, the price and costs per unit will be affected.. If the low-inflation environment considered the baseline, then the analysis concerning the high inflation environment could be considered:

A) a sensitivity analysis.
B) a scenario analysis.
C) a Monte Carlo simulation.
D) a horizontal analysis.

Question 50

The economic break-even point is the number of units that must be sold each year over the life of a project in order for the NPV of that project to equal to _____.

A) $0
B) $1
C) the present value of cash inflows
D) the present value of investment

Question 51

Which of the following statements is true of the economic break-even point?

A) It is the number of units that must be sold for accounting operating profit to equal $0.
B) It is the level of unit sales at which cash flows or profitability for one project alternative switches from being lower than that of another alternative to being higher.
C) It is the number of units that must be sold each year during the life of a project so that the NPV of a project equals $0.
D) It is the number of units that must be sold for pretax operating cash flow to be $0.

Question 52

If a project has an 80 percent probability of high demand and a 20 percent probability of low demand, then the expected value of the net present value of the two different demand assumptions would give us a weighted average net present value for the project. Such an analysis is called:

A) a sensitivity analysis.
B) a scenario analysis.
C) a simulation analysis.
D) a horizontal analysis.

Question 53

An analysis in which each of the inputs and assumptions for a project takes on a separate assumed distribution whereby a computer draws on each of those input and assumption distributions to create a distribution for the NPV of the entire project is called:

A) a sensitivity analysis.
B) a scenario analysis.
C) a simulation analysis.
D) a horizontal analysis.

Question 54

_____ is a measure of the sensitivity of EBITDA or EBIT to changes in revenue.

A) Total leverage
B) Financial leverage
C) Operating leverage
D) Combined leverage

Question 55

Which of the following describes the effect of changes in sets of interrelated variables?

A) a sensitivity analysis.
B) a scenario analysis.
C) a Monte Carlo simulation.
D) a horizontal analysis.

Question 56

Which is the term used to define how many units must be sold for pre-tax operating cash flow to be equal to zero?

A) Pre-tax accounting operating profit break-even point
B) Pre-tax operating financial leverage break-even point
C) Pre-tax accounting sensitivity break-even point
D) Pre-tax operating cash flow break-even point

Question 57

Which of the following statements is true?

A) The degree of pretax cash flow operating leverage remains same for any level of revenue.
B) The higher the proportion of fixed costs to variable costs in a project, the greater the sensitivity of pre-tax operating cash flows to changes in revenue.
C) Depreciation and amortization are deducted to get pretax operating cash flows.
D) The lower the proportion of fixed costs to variable costs in a project, the more pre-tax operating cash flows will vary as revenue varies.

Question 58

The higher a project's operating leverage, _____.

A) the lower the sensitivity of EBIT to changes in revenue
B) the greater the sensitivity of EBITDA to changes in revenue
C) the lower the sensitivity of net profit to changes in variable costs
D) the greater the sensitivity of net profit to changes in variable costs

Question 59

Scenario analysis can help a firm to:

A) understand the degree of uncertainty that a different set of project-affecting circumstances may hold.
B) eliminate all of the uncertainty that a different set of project-affecting circumstances may hold.
C) transform a risky project into a risk-free project.
D) understand the degree of certainty that a similar set of project-affecting circumstances may hold.

Question 60

Which of the following differentiates accounting operating profit break-even point from pre-tax operating cash flow break-even point?

A) Accounting operating profit break-even point includes interest expense in the numerator, whereas pre-tax operating cash flow does not.
B) Pre-tax operating cash flow break-even point includes income taxes in the denominator, whereas accounting operating profit break-even point does not.
C) Accounting operating profit break-even point includes depreciation & amortization in the numerator, whereas pre-tax operating cash flow does not.
D) Pre-tax operating cash flow break-even point includes interest expense in the numerator, whereas accounting operating profit break-even point does not.

Question 61

Oeta Works has a degree of pretax cash flow operating leverage of 1.25. If the firm's EBITDA was $1,000 last year while its depreciation and amortization expense was $50 in the same year, then what was the firm's degree of accounting operating leverage?

A) 1.26
B) 1.30
C) 1.32
D) 1.35

Question 62

Synthgration has a degree of pretax cash flow operating leverage equal to 1.266. If the firm's EBITDA was $1,500 last year while its depreciation and amortization expense was $100 in the same year, then what was the firm's degree of accounting operating leverage?

A) 1.29
B) 1.33
C) 1.36
D) 1.39

Question 63

Ergotone Audio had a degree of accounting operating leverage equal to 1.60 during the most recent period. If the firm's EBITDA was $3,000 and its fixed costs were equal to $1,250, then what was Ergotone 's depreciation and amortization expense during the same period?(Round the final answer to the nearest whole dollar.)

A) $344
B) $507
C) $377
D) $404

Question 64

Metkia Inc. had a degree of accounting operating leverage equal to 1.841 during the most recent period. If the firm's EBITDA was $4,800 and depreciation and amortization was equal to$600, then what was Metkia's fixed cash expenses during the same period? (Round your answer to the nearest whole dollar.)

A) $1,548
B) $2,932
C) $2,324
D) $2,886

Question 65

Mussubsound Audotec Inc. had EBIT of $1,850 last year with fixed costs equal to $500 (depreciation and amortization not included) and depreciation and amortization equal to $150. What was Mussubsound Audotec's degree of accounting operating leverage?

A) 1.25
B) 1.35
C) 1.38
D) 1.40

Question 66

Sparran Craft had sales of $2.24 million last year for which the total cost was $2 million. If the firm had fixed costs of $600,000 on sales of 56,000 books, then what is the firm's per-unit contribution? (Round the final answer to the nearest whole dollar.)

A) $20.00
B) $19.00
C) $15.00
D) $10.00

Question 67

A change in the price of a product sold by a firm usually involves less units sold and a change in the product's cost structure. If a firm were interested in the entire price change effect on the project's NPV, then it would conduct:

A) sensitivity analysis.
B) scenario analysis.
C) simulation analysis.
D) contribution analysis.

Question 68

If a firm is interested in the distribution of the NPV for a project that it is considering, then the firm should be most interested in:

A) a sensitivity analysis.
B) a scenario analysis.
C) a simulation analysis.
D) a horizontal analysis.

Question 69

Dupaudio Inc. had EBITDA of $3,000 and EBIT of $2,750, with fixed cash expense of $600 last year. What was Dupaudio's degree of accounting operating leverage?

A) 1.20
B) 1.25
C) 1.28
D) 1.31

Question 70

Which of the following mathematical expressions is used to calculate the degree of accounting operating leverage?

A) 1 + (FC / EBITDA)
B) 1 + (FC / EBIT)
C) 1 + [(FC + Depreciation and Amortization) / EBITDA]
D) 1 + [(FC + Depreciation and Amortization) / EBIT]

Question 71

Treguard Inc. has total fixed costs of $8,500 per month. It sells rib plates for $15 each and the variable cost of providing each plate is $10. What is the pretax operating cash flow break-even point for Treguard?

A) 567 plates
B) 1,700 plates
C) 1,900 plates
D) 1,622 plates

Question 72

Which of the following mathematical expressions is used to calculate the degree of pretax cash flow operating leverage?

A) 1 + (FC / EBITDA)
B) 1 + (FC / EBIT)
C) 1 + [(FC + Depreciation and Amortization) / EBITDA]
D) 1 + [(FC + Depreciation and Amortization) / EBIT]

Question 73

Ranbow Inc.is about to introduce a new LED clock and has determined that it will charge $35 per clock. The firm must decide whether or not to purchase a high-capacity clock-making machine. If the high-capacity machine is selected, then the fixed costs for the firm will be $4,000 per year, with variable costs of $6 per clock. Otherwise the fixed costs will be $800, with variable costs of $16 per clock. Above what level of expected sales should Ranbow Inc. choose the high fixed cost alternative to maximize pretax operating cash flow?

A) 320 units
B) 352 units
C) 3200 units
D) 500 units

Question 74

AchtTre has found that its pretax operating cash flow basis break-even number of glasses sold is 550,000 pairs. If each pair is sold for $15 and the variable cost per unit is $10, then what is the amount of AchtTre's fixed costs?

A) $887,000
B) $1,558,000
C) $2,750,000
D) $1,582,000

Question 75

Resoneffect Inc. has a degree of pretax cash flow operating leverage equal to 1.12. If the firm's EBITDA was $2,000 last year while its depreciation and amortization expense was $150 in the same year, then what was the firm's degree of accounting operating leverage? (Round the final answer to two decimal places.)

A) 1.09
B) 1.21
C) 2.09
D) 2.18

Question 76

An analytical method that uses a computer to quickly examine a large number of scenarios and obtain probability estimates for various values in a financial analysis is known as:

A) risk analysis.
B) credit analysis.
C) capital structure analysis.
D) simulation analysis.

Question 77

Which of the following project risk analyses is best able to analyze the effect of a single set of circumstances, with correlated inputs, on the NPV of a project?

A) Sensitivity analysis.
B) Scenario analysis.
C) Simulation analysis.
D) Contribution analysis.

Question 78

Which of the following project risk analyses is best able to analyze the effect of a single input, uncorrelated with other inputs, on the NPV of a project?

A) Sensitivity analysis
B) Scenario analysis
C) Simulation analysis
D) Horizontal analysis

Question 79

Silevector has a degree of pretax cash flow operating leverage equal to 1.341. If the firm's EBITDA was $2,500 last year while its depreciation and amortization expense was $200 in the same year, then what was the firm's degree of accounting operating leverage? (Do not round the intermediate calculations. Round your final answer to two decimal places)

A) 2.54
B) 1.96
C) 1.46
D) 2.39

Question 80

SileCuatro has produced 22,000 tins in a year. The pretax operating cash flow (EBITDA) break-even point is 22,000 tins. If the fixed costs for the product is $1,500,000 and the variable cost per tin is $298, then what price can SileCuatro charge per tin if the firm needs to break even on a pretax operating cash flow basis? (Round to nearest whole dollar.)

A) $366
B) $298
C) $268
D) $372