Question 1

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 accept the project because you are certain to
increase shareholder wealth.

Accepted Answer

A) True 
 B)False

Question 2

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 3

The Alfonso Company is analyzing a project with expected sales of 4,000 units, give or take 5 percent. The expected variable cost per unit is $9 and the expected total ﬁxed costs are $17,000.
Cost estimates are considered accurate within a plus or minus 2 percent range. The depreciation
Expense is $3,000. The sale price is estimated at $18 a unit, give or take 5 percent. Sensitivity
Analysis is based on the most likely scenario.
What is the sales revenue under the worst case scenario?

Accepted Answer

A)  $64,980 
B)  $68,400 
C)  $71,820 
D)  $72,610 
E)  $75,600

Question 4

Degree of operating leverage (DOL) is equal to the percentage change in OCF divided by the
percentage change in sales quantity.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements about simulation analysis is correct?

Accepted Answer

A)  The method essentially combines aspects of the scenario and sensitivity analysis techniques. 
B)  An advantage of this approach is that once the results are complete, there is often a clear decision rule to follow. 
C)  It is costly and likely used as a last resort for the analysis of capital budgeting projects. 
D)  Powerful computers are making this technique ever more impractical. 
E)  The probability of occurrence for different cases is most likely very easy to assess.

Question 6

The key inputs into a discounted cash ﬂow analysis are the projected:

Accepted Answer

A)  Net income amounts for each year of the project. 
B)  Cash ﬂows for each period of time. 
C)  Sales and opportunity costs for each year of the project. 
D)  Initial costs and related depreciation expenses. 
E)  Changes in net income resulting from accepting a project.

Question 7

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 8

A project has an initial cost of $94,000 for equipment, which will be depreciated straight-line to zero over the ﬁve-year life of the project. There is no salvage value on the equipment. No working
Capital is required. Sales are estimated at 6,000 units at a selling price of $31.40 per unit. Variable
Costs are $22.80 and ﬁxed costs are $41,600. The required rate of return is 14% and the marginal
Tax rate is 35%. If the sales quantity increases by 100 units, the net present value will increase by:

Accepted Answer

A)  $667 
B)  $897 
C)  $1,364. 
D)  $1,919. 
E)  $2,952

Question 9

What is the cash break-even point? Price = $100 per unit; variable cost = $24 per unit, ﬁxed cost = $40,000 per year; depreciation = $10,000 per year. Assume a discount rate of 10%, project initial
Outlay of $100,000, project life of 10 years, and ignore taxes.

Accepted Answer

A)  527 units 
B)  624 units 
C)  658 units 
D)  741 units 
E)  1,130 units

Question 10

A project has the following estimated data: price = $150 per unit; variable costs = $88 per unit; ﬁxed costs = $250,000; required return = 11%; initial investment = $200,000; $50,000 salvage value; life =
Ten years. What is the ﬁnancial break-even quantity?

Accepted Answer

A)  4,032 units. 
B)  4,274 units. 
C)  4,532 units. 
D)  4,784 units. 
E)  4,955 units.

Question 11

Which one of the following is a ﬁxed cost in the short-run?

Accepted Answer

A)  A lease on a pickup truck. 
B)  The cost of a machine operator. 
C)  The cost of raw materials. 
D)  The cost of building maintenance. 
E)  Employee beneﬁts for administrative staff.

Question 12

The degree of operating leverage is deﬁned as the percentage change in _____ relative to the percentage change in _____.

Accepted Answer

A)  net income; ﬁxed costs 
B)  net income; total revenue 
C)  operating cash ﬂow; ﬁxed costs 
D)  operating cash ﬂow; total revenue 
E)  operating cash ﬂow; quantity sold

Question 13

To determine the degree to which the projected net present value of a project is dependent upon a single variable you should conduct _____ analysis.

Accepted Answer

A)  Sensitivity. 
B)  Scenario. 
C)  Accounting break-even. 
D)  Financial break-even. 
E)  Cash break-even.

Question 14

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 15

The higher the degree of operating leverage, the higher the break-even point, regardless of how it's
measured.

Accepted Answer

A) True 
 B)False

Question 16

A project has a contribution margin of $3.20, projected ﬁxed costs of $9,400, projected variable costs per unit of $7.25, and a projected ﬁnancial break-even point of 6,100 units. What is the
Operating cash ﬂow at this level of output?

Accepted Answer

A)  $10,120 
B)  $10,487 
C)  $10,504 
D)  $10,523 
E)  $10,698

Question 17

Which one of the following is most likely a variable cost?

Accepted Answer

A)  Oﬃce rent. 
B)  Property taxes. 
C)  Property insurance. 
D)  Direct labor costs. 
E)  Management salaries.

Question 18

Which of the following best describe the term sensitivity analysis.

Accepted Answer

A)  Investigation of what happens to NPV when only one variable is changed. 
B)  The determination of what happens to NPV estimates when we ask what-if questions. 
C)  The degree to which a ﬁrm or project relies on ﬁxed costs. 
D)  The change in costs that occurs when there is a small change in output. 
E)  Taking into account the managerial options that are implicit in a project.

Question 19

What are the earnings before interest and taxes?

Accepted Answer

A)  $38,000 
B)  $44,000 
C)  $50,000 
D)  $59,500 
E)  $65,000

Question 20

TR Industries manage a product with a 2.6 degree of operating leverage. Sales of the product are expected to decline by 8 percent next year as an economic downturn is anticipated. What is the
Expected change in the operating cash ﬂow for this product for next year?

Accepted Answer

A)  -20.8 percent 
B)  -5.4 percent 
C)  5.4 percent 
D)  10.8 percent 
E)  20.8 percent

Exam 11: Project Analysis and Evaluation

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 accept the project because you are certain to increase shareholder wealth.

Degree of operating leverage (DOL) is equal to the percentage change in OCF divided by the percentage change in sales quantity.

Which of the following statements about simulation analysis is correct?

The key inputs into a discounted cash ﬂow analysis are the projected:

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:

What is the cash break-even point? Price = $100 per unit; variable cost = $24 per unit, ﬁxed cost = $40,000 per year; depreciation = $10,000 per year. Assume a discount rate of 10%, project initial Outlay of $100,000, project life of 10 years, and ignore taxes.

A project has the following estimated data: price = $150 per unit; variable costs = $88 per unit; ﬁxed costs = $250,000; required return = 11%; initial investment = $200,000; $50,000 salvage value; life = Ten years. What is the ﬁnancial break-even quantity?

Which one of the following is a ﬁxed cost in the short-run?

The degree of operating leverage is deﬁned as the percentage change in _ relative to the percentage change in _.

To determine the degree to which the projected net present value of a project is dependent upon a single variable you should conduct _____ analysis.

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

The higher the degree of operating leverage, the higher the break-even point, regardless of how it's measured.

A project has a contribution margin of $3.20, projected ﬁxed costs of $9,400, projected variable costs per unit of $7.25, and a projected ﬁnancial break-even point of 6,100 units. What is the Operating cash ﬂow at this level of output?

Which one of the following is most likely a variable cost?

Which of the following best describe the term sensitivity analysis.

What are the earnings before interest and taxes?

TR Industries manage a product with a 2.6 degree of operating leverage. Sales of the product are expected to decline by 8 percent next year as an economic downturn is anticipated. What is the Expected change in the operating cash ﬂow for this product for next year?