Question 1

Suppose that a project has a DOL = 0.75. If the quantity being produced increases from 96 to 100, what is the expected percentage change in operating cash ﬂow?

Accepted Answer

A)  -2.5% 
B)  3.1% 
C)  4.2% 
D)  5.5% 
E)  6.2%

Question 2

Given the following information, what is the ﬁnancial break-even point? Initial investment = $300,000; variable cost = $120; ﬁxed cost = $65,000; price = $150; life = six years; required return =
10%; depreciation = $50,000; salvage value of assets = $25,000; initial net working capital
Investment = $10,000. Ignore taxes.

Accepted Answer

A)  1,392 units 
B)  2,600 units 
C)  3,972 units 
D)  4,005 units 
E)  4,388 units

Question 3

A project with a high degree of operating leverage has an initial cash outlay that is generally
relatively large in relation to the size of the project.

Accepted Answer

A) True 
 B)False

Question 4

The Colby Brothers have been busy analyzing a new product. They have determined that an operating cash ﬂow of $18,200 will result in a zero net present value, which is a company
Requirement for project acceptance. The ﬁxed costs are $11,650 and the contribution margin is
$7)40. The company feels that they can realistically capture ﬁve percent of the 75,000 unit market
For this product. Should the company develop the new product? Why or why not?

Accepted Answer

A)  Yes; The project has an expected internal rate of return of 100 percent. 
B)  Yes; The expected level of sales exceeds the required number of units. 
C)  Yes; The project is expected to sell 324 units more than the required number of units. 
D)  No; The expected level of sales is less than the required level of 4,034 units. 
E)  No; The annual sales would need to exceed 4,521 units to be acceptable.

Question 5

You have put together a set of cash ﬂow forecasts for a project and have found, on your ﬁrst
calculation, that the NPV is positive. You should try to assess the degree of forecasting risk that
exists with the project.

Accepted Answer

A) True 
 B)False

Question 6

Blumberg Industries has just completed its analysis of a proposed project. The results show that if the project is accepted, the ﬁrm will lose an amount of money which is exactly equal to their initial
Investment in the project. This means that:

Accepted Answer

A)  The ﬁrm should accept the project as long as they are conﬁdent of the assumptions used in the analysis. 
B)  The ﬁxed costs per unit are exactly equal to the contribution margin at the projected level of sales. 
C)  Sales are estimated at the ﬁnancial break-even point. 
D)  The estimated cash ﬂow is equal to the depreciation expense. 
E)  The project has a discounted payback period exactly equal to the life of the project.

Question 7

When a ﬁrm has a high degree of operating leverage:

Accepted Answer

A)  Its projected cash ﬂows are known with great certainty. 
B)  It is highly susceptible to damage created by forecasting errors. 
C)  Its cash ﬂows remain relatively constant regardless of its sales level. 
D)  It will have a relatively low level of ﬁxed assets. 
E)  It will low ﬁxed costs and high variable costs.

Question 8

The accounting break-even point has an internal rate of return is zero.

Accepted Answer

A) True 
 B)False

Question 9

A project that just breaks even on a ﬁnancial basis will not pay back.

Accepted Answer

A) True 
 B)False

Question 10

The Quick Producers Co. is analyzing a proposed project. The company expects to sell 10,000 units, give or take 5 percent. The expected variable cost per unit is $6 and the expected ﬁxed cost
Is $29,000. The ﬁxed and variable cost estimates are considered accurate within a plus or minus 4
Percent range. The depreciation expense is $25,000. The tax rate is 34 percent. The sale price is
Estimated at $13 a unit, give or take 6 percent.
What is the net income under the best case scenario?

Accepted Answer

A)  $5,440.00 
B)  $10,665.80 
C)  $15,846.60 
D)  $20,704.20 
E)  $24,696.80

Question 11

All else the same, if a ﬁrm revises its production process to use more labour and less machinery, the
ﬁrm will have a decreased accounting break-even.

Accepted Answer

A) True 
 B)False

Question 12

A ﬁrm that cannot raise funds in the ﬁnancial markets in order to ﬁnance positive NPV projects is
said to face soft capital rationing.

Accepted Answer

A) True 
 B)False

Question 13

A project that has a payback period exactly equal to its life is a project that is operating at its:

Accepted Answer

A)  Cash break-even point. 
B)  Incremental maximum level of sales. 
C)  Financial break-even point. 
D)  Accounting break-even point. 
E)  Base case level of sales.

Question 14

The sales level that results in a project net present value exactly equal to zero is called:

Accepted Answer

A)  Operational break-even. 
B)  Leveraged break-even. 
C)  Accounting break-even. 
D)  Cash break-even. 
E)  Financial break-even.

Question 15

The situation that exists when a ﬁrm has no means of ﬁnancing its positive net present value projects is referred to as:

Accepted Answer

A)  Financial stop-loss. 
B)  Contingency planning. 
C)  Marginal loss planning. 
D)  Soft rationing. 
E)  Hard rationing.

Question 16

Sensitivity analysis is conducted by:

Accepted Answer

A)  Holding all variables at their base level and changing the required rate of return assigned to a project. 
B)  Changing the value of two variables to determine their interdependency. 
C)  Changing the value of a single variable and computing the resulting change in the current value of a project. 
D)  Assigning either the best or the worst possible value to each variable and comparing the results to those achieved by the base case. 
E)  Managers after a project has been implemented to determine how each variable relates to the level of output realized.

Question 17

At the accounting break-even point, ______________.

Accepted Answer

A)  Net present value is positive. 
B)  Net income is positive. 
C)  The project operating cash ﬂow is equal to depreciation expense. 
D)  A project's cash ﬂow is equal to zero. 
E)  The price per unit and variable cost per unit are equal.

Question 18

The president of your ﬁrm would like to offer special sale prices to your best customers under the following terms:
The prices will apply only to units purchased in excess of those normally purchased by the
Customer.
The units purchased must be paid for in cash at the time of sale.
The total quantity sold under these terms cannot exceed the excess capacity of the ﬁrm.
The net proﬁt of the ﬁrm should not be affected either positively or negatively.
Given these conditions, the special sale price should be set equal to the:

Accepted Answer

A)  Average variable cost. 
B)  Average total cost minus the marginal cost. 
C)  Sensitivity value of the variable cost. 
D)  Marginal cost. 
E)  Marginal cost minus the average ﬁxed cost per unit.

Question 19

A project that just breaks even on a ﬁnancial basis has a PI equal to zero.

Accepted Answer

A) True 
 B)False

Question 20

The procedure of allocating a ﬁxed amount of funds for capital spending to each business unit is called:

Accepted Answer

A)  Marginal spending. 
B)  Average spending. 
C)  Soft rationing. 
D)  Hard rationing. 
E)  Marginal rationing.

Exam 11: Project Analysis and Evaluation

Suppose that a project has a DOL = 0.75. If the quantity being produced increases from 96 to 100, what is the expected percentage change in operating cash ﬂow?

A project with a high degree of operating leverage has an initial cash outlay that is generally relatively large in relation to the size of the project.

You have put together a set of cash ﬂow forecasts for a project and have found, on your ﬁrst calculation, that the NPV is positive. You should try to assess the degree of forecasting risk that exists with the project.

Blumberg Industries has just completed its analysis of a proposed project. The results show that if the project is accepted, the ﬁrm will lose an amount of money which is exactly equal to their initial Investment in the project. This means that:

When a ﬁrm has a high degree of operating leverage:

The accounting break-even point has an internal rate of return is zero.

A project that just breaks even on a ﬁnancial basis will not pay back.

All else the same, if a ﬁrm revises its production process to use more labour and less machinery, the ﬁrm will have a decreased accounting break-even.

A ﬁrm that cannot raise funds in the ﬁnancial markets in order to ﬁnance positive NPV projects is said to face soft capital rationing.

A project that has a payback period exactly equal to its life is a project that is operating at its:

The sales level that results in a project net present value exactly equal to zero is called:

The situation that exists when a ﬁrm has no means of ﬁnancing its positive net present value projects is referred to as:

Sensitivity analysis is conducted by:

At the accounting break-even point, ______________.

A project that just breaks even on a ﬁnancial basis has a PI equal to zero.

The procedure of allocating a ﬁxed amount of funds for capital spending to each business unit is called: