Question 1

Why is it important to consider real options in the capital budgeting process? Give two specific examples.

Accepted Answer

The answer of Why is it important to consider real...

Question 2

Using simulation provides the financial manager with a probability distribution of an investment's net present value or internal rate of return.

Accepted Answer

A) True 
 B)False

Question 3

Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each.It believes that unit sales will grow between -5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2013 if the number of units sold increases by 5% per year and prices remain flat.

Accepted Answer

A) $2,880,000 
B) $3,168,000 
C) $3,333,960 
D) $3,175,200

Question 4

List at least four typical value drivers that could seriously impact the outcome of a project.

Accepted Answer

The answer of List at least four typical value drivers...

Question 5

What is the NPV of the project if first year savings are only $75,000 and the project is not sold.

Accepted Answer

A) ($4,545) 
B) ($15,691) 
C) $15,691 
D) $75,000

Question 6

Why is it important to perform risk analysis before accepting or rejecting major projects?

Accepted Answer

The answer of Why is it important to perform risk...

Question 7

Scenario analysis is the form of risk analysis:

Accepted Answer

A) that examines the relationship between total firm cash flows and the NPV of a particular project. 
B) that examines the volatility of NPV. 
C) that examines the impact of key variables such as sales or costs in various combinations. 
D) that examines the impact of key variables such as sales or costs one at a time.

Question 8

Chevre Imported Cheese Inc.forecasts that if sales revenue for next year is $1,250,000,net operating income will be $100,000 and if sales revenue is $1,000,000,net operating income will be $80,000.Chevre's degree of operating leverage is:

Accepted Answer

A) 2. 
B) 10. 
C) .5. 
D) 1.

Question 9

What is the expected net operating profit after tax (NOPAT)for the best case scenario?

Accepted Answer

A) $493,500 
B) $330,000 
C) $394,500 
D) $124,500

Question 10

Which of the following is NOT a typical real option in capital budgeting?

Accepted Answer

A) The option to expand the project 
B) The option to abandon the project 
C) The option to reduce the scale of a project 
D) The option to discount the project at a lower rate of return

Question 11

What is the NPV of the project if it is expanded?

Accepted Answer

A) $100,000 
B) $500,000 
C) $300,000 
D) $600,000

Question 12

The form of risk analysis which examines the effect of various combinations of value drivers is known as:

Accepted Answer

A) scenario analysis. 
B) sensitivity analysis. 
C) value driver analysis. 
D) expected value analysis.

Question 13

What are the consequences of excessive optimism or pessimism in forecasting expected project cash flows?

Accepted Answer

The answer of What are the consequences of excessive optimism...

Question 14

Real options can have the effect of:

Accepted Answer

A) increasing a project's NPV. 
B) reducing a project's risk. 
C) gaining information about future opportunities. 
D) all of the above.

Question 15

Miniature Molding is planning to introduce a valve for use in medical implants.Variable costs per unit are $250.The maximum price MM could charge is $325.Fixed costs associated with this product are $20,000,000.The worst case forecast calls for sales of 240,000 valves,the best case for $290,400.Will MM reach accounting break-even in the worst case scenario?

Accepted Answer

A) Sales will fall short of break even by $8,666,667. 
B) The product will exactly break even. 
C) Sales will fall short of break even by $5,000,025. 
D) Sales will exceed break even $58,000,000.

Question 16

What is the expected free cash flow for the best case scenario?

Accepted Answer

A) $414,400 
B) $330,000 
C) $394,500 
D) $383,240

Question 17

Net present value break-even is reached:

Accepted Answer

A) after the time period when NPV finally turns from negative to positive. 
B) at the discount rate that produces an NPV of $0.00. 
C) at the level of sales over the life of the project that results in free cash flow of $0.000 for a given period. 
D) at the level of sales over the life of the project that results in an NPV of $0.00.

Question 18

Brookfield Heavy Equipment is considering a project that will produce after tax cash of $40,000 per year for 5 years.The project will require an initial investment of $144,191.At what discount rate will the project reach break-even NPV?

Accepted Answer

A) 8% 
B) 10% 
C) 12% 
D) 11.11%

Question 19

What is the expected net operating profit after tax (NOPAT)if the most likely estimates are used?

Accepted Answer

A) $493,500 
B) $330,000 
C) $300,000 
D) $124,500

Question 20

The Oviedo Thespians are planning to present performances of their Florida Revue on 2 consecutive nights in January.It will cost them $5,000 per night for theater rental,event insurance and professional musicians.The theater will also take 10% of gross ticket sales.How many tickets must they sell at $10.00 per ticket to break even?

Accepted Answer

A) 1000 tickets 
B) 1,112 tickets 
C) 1,223 tickets 
D) There is not enough information

Exam 13: Risk Analysis and Project Evaluation