Question 1

Which of the following best describe the term financial break-even.

Accepted Answer

A)  The percentage change in operating cash flow relative to the percentage change in quantity sold. 
B)  The sales level that results in a zero NPV. 
C)  Costs that do not change when the quantity of output changes during a particular time period. 
D)  The possibility that errors in projected cash flows lead to incorrect decisions. 
E)  Opportunities that managers can exploit if certain things happen in the future.

Question 2

A proposed project has fixed costs of $3,600, depreciation expense of $1,500, and a sales quantity of 1,300 units. What is the contribution margin if the projected level of sales is the accounting break-even point?

Accepted Answer

A)  $3.92 
B)  $4.14 
C)  $4.50 
D)  $4.80 
E)  $5.00

Question 3

In previous chapters, we calculated NPV based on a project's forecast cash flows. When doing what-if analysis, this initial estimate is called the ______________.

Accepted Answer

A)  Initial analysis. 
B)  First go-around. 
C)  Base case. 
D)  Initial projection. 
E)  Best case scenario.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Costs that result from a small change in output are called ___________.

Accepted Answer

A)  Fixed costs. 
B)  Marginal costs. 
C)  Average costs. 
D)  Incremental costs. 
E)  Product costs.

Question 6

BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per unit sold is $10. Fixed costs are $30,000 per year.

Using the BASIC INFORMATION only, if you expect to sell 7,000 units per year, what is the OCF in year 2 assuming a required return of 15% and a tax rate of 30%?

Accepted Answer

A)  $17,000 
B)  $20,000 
C)  $34,000 
D)  $48,000 
E)  $55,000

Question 7

A project with IRR = -100% is operating at the __________ break-even point.

Accepted Answer

A)  Cash. 
B)  Accounting. 
C)  Financial. 
D)  Sales. 
E)  Leveraged.

Question 8

The financial break-even point plays a unique role in the decision making process. What is that role and why is it important?

Accepted Answer

The answer of The financial break-even point plays a unique...

Question 9

Jasper United is a young firm that expects to see their sales quantity increase exponentially over the next ten years due to their product innovation. Given this, management has decided that the firm should invest heavily in equipment and facilities capable of producing large quantities of output at a low marginal cost. This decision will result in relatively _____ costs per unit and _____ costs per unit.

Accepted Answer

A)  High fixed; high variable. 
B)  High fixed; low variable. 
C)  High fixed; zero variable. 
D)  Low fixed; high variable. 
E)  Low fixed; low variable.

Question 10

A project has the following estimated data: price = $80 per unit; variable costs = $55 per unit; fixed costs = $25,000; required return = 15%; initial investment = $44,000; life = five years. What is the cash break-even quantity?

Accepted Answer

A)  1,000 units 
B)  1,352 units 
C)  1,525 units 
D)  1,775 units 
E)  1,950 units

Question 11

Which of the following best describe the term cash break-even.

Accepted Answer

A)  The sales level that results in zero project net income. 
B)  The sales level where operating cash flow is equal to zero. 
C)  Costs that change when the quantity of output changes. 
D)  Options for future, related business products or strategies. 
E)  A combination of scenario and sensitivity analyses.

Question 12

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

Accepted Answer

A)  Suspend. 
B)  Expand. 
C)  Abandon. 
D)  Contract. 
E)  Withdraw.

Question 13

The Lakeside Inn is considering expanding their operations. Fixed costs are estimated at $92,000 a year. The variable cost per unit is estimated at $22.50. The estimated sales price is $37.50 per unit. What is the cash break-even point of this project? (Round to whole units.)

Accepted Answer

A)  6,133 
B)  6,420 
C)  6,667 
D)  7,000 
E)  7,180

Question 14

Thompson & Son have been busy analyzing a new product. They have determined that an operating cash flow of $16,700 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $12,378 and the contribution margin is $6.20. The company feels that they can realistically capture 10 percent of the 50,000 unit market for this product. Should the company develop the new product? Why or why not?

Accepted Answer

A)  Yes; because 5,000 units of sales exceeds the quantity required for a zero net present value. 
B)  Yes; because the cash break-even point is less than 5,000 units. 
C)  No; because the firm cannot generate sufficient sales to obtain at least a zero net present value. 
D)  No; because the project has an expected internal rate of return of negative 100 percent. 
E)  No; because the project will not pay back on a discounted basis.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

ABC, Inc. is considering a project with a discounted payback just equal to the project's life. The projections include a sales price of $13, variable cost per unit of $10.50, and fixed costs of $5,000. The operating cash flow is $6,300. What is the break-even quantity?

Accepted Answer

A)  3,869 units 
B)  3,913 units 
C)  4,340 units 
D)  4,520 units 
E)  4,610 units

Question 17

At the cash break-even point, a multi-year project has a net present value that is equal to:

Accepted Answer

A)  Fixed costs. 
B)  The initial cash outlay. 
C)  The annual depreciation expense. 
D)  The contribution margin. 
E)  Zero.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Fixed costs are constant for a given period of time.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 11: Project Analysis and Evaluation

Which of the following best describe the term financial break-even.

A proposed project has fixed costs of $3,600, depreciation expense of $1,500, and a sales quantity of 1,300 units. What is the contribution margin if the projected level of sales is the accounting break-even point?

In previous chapters, we calculated NPV based on a project's forecast cash flows. When doing what-if analysis, this initial estimate is called the ______________.

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

Costs that result from a small change in output are called ___________.

A project with IRR = -100% is operating at the __________ break-even point.

The financial break-even point plays a unique role in the decision making process. What is that role and why is it important?

A project has the following estimated data: price = $80 per unit; variable costs = $55 per unit; fixed costs = $25,000; required return = 15%; initial investment = $44,000; life = five years. What is the cash break-even quantity?

Which of the following best describe the term cash break-even.

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

The Lakeside Inn is considering expanding their operations. Fixed costs are estimated at $92,000 a year. The variable cost per unit is estimated at $22.50. The estimated sales price is $37.50 per unit. What is the cash break-even point of this project? (Round to whole units.)

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

ABC, Inc. is considering a project with a discounted payback just equal to the project's life. The projections include a sales price of $13, variable cost per unit of $10.50, and fixed costs of $5,000. The operating cash flow is $6,300. What is the break-even quantity?

At the cash break-even point, a multi-year project has a net present value that is equal to:

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

Fixed costs are constant for a given period of time.

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