Question 1

One advantage of simulation is that it can differentiate between unsystematic and systematic risk.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A)  $300,000 
B)  $223,500 
C)  $174,000 
D)  $124,500

Question 3

If the worst case scenario for a project results in an NPV of zero, the project should be accepted.

Accepted Answer

A) True 
 B)False

Question 4

An appropriate tool to analyze the interaction of various value drivers for Destroya Extermination Services would be

Accepted Answer

A)  simulation. 
B)  scenario analysis. 
C)  sensitivity analysis. 
D)  either A or B.

Question 5

Variable cost for Light.com's fluorescent tubes is $12.50, the tubes are sold over the internet to businesses and organizations for $20.00 each. Fixed costs are $7,500,000. What is the break-even quantity for the fluorescent tubes?

Accepted Answer

A)  600,000 
B)  1,000,000 
C)  375,000 
D)  7,500,000

Question 6

When using simulation to analyze a large capital project, the decision rule is

Accepted Answer

A)  There is no clear cut decision rule, but the probabilities will produce a more informed decision. 
B)  Accept the project if the probability of a positive NPV is greater than 50%. 
C)  Reject the project if the probability of a negative NPV is greater than 5% 
D)  Reject the project if the probability of a negative NPV is greater than 16%

Question 7

Betty Gilmore plans to sell berry pies at a local farmer's market. The permit and space rental will cost her $2,000 for the June through August season. The pies will sell for $7.00. Ingredients and overhead average $4.00 per pie. She also has to pay five percent of her gross sales to the markets's organizers. How many pies will she need to sell to cover her fixed costs and realize a $3,000 profit?

Accepted Answer

A)  752 
B)  1,667 pies 
C)  1,887 pies. 
D)  1,250 pies

Question 8

________ is a method of quantifying uncertainty without having to estimate probabilities.

Accepted Answer

A)  Standard deviation 
B)  Sensitivity analysis 
C)  Coefficient of variation 
D)  Decision tree analysis

Question 9

February sales for Ted's Variety Store equal $100,000, variable costs equal $60,000, fixed costs, including depreciation of $20,000, total $60,000.

Accepted Answer

A)  Teds' Variety Store broke even with respect to net income. 
B)  Teds' Variety Store broke even with respect to cash. 
C)  Ted's Variety fell $20,000 short of cash break-even. 
D)  Teds' Variety Store broke even with a $20,000 surplus.

Question 10

The NPV of a project based on forecasted cash flows is $1,000,000. There is a 40% probability that cash flows from the project will be seriously reduced because competitors will enter the market. In this case, if the company did nothing, the NPV would be ($500,000). The project can also be abandoned after 2 years and NPV will be ($100,000). What is the expected NPV of the project when the option to abandon is considered. Should the projected be accepted?

Accepted Answer

The answer of The NPV of a project based on...

Question 11

Briefly distinguish between sensitivity analysis, scenario analysis, and simulation.

Accepted Answer

The answer of Briefly distinguish between sensitivity analysis, scenario analysis,...

Question 12

Which of the following is considered the major risk when analyzing projects in a multinational environment?

Accepted Answer

A)  Currency fluctuations 
B)  Inflation 
C)  Political risk 
D)  Lack of available betas

Question 13

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 14

Bay State Tubing has a large manufacturing facility in Central America is particularly concerned that a tariff of unknown size will be imposed on goods reimported from that region. The type of risk analysis that accounts for various levels of tariff is

Accepted Answer

A)  sensitivity analysis. 
B)  political risk analysis. 
C)  scenario analysis. 
D)  exchange rate analysis.

Question 15

What is the expected NPV of the project if the option to expand is not considered?

Accepted Answer

A)  $39,539 
B)  $86,924 
C)  $236,924 
D)  $134,309

Question 16

Sensitivity 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 17

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 18

________ is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.

Accepted Answer

A)  Project standing alone risk 
B)  Decision tree analysis 
C)  Scenario analysis 
D)  Pure play method

Question 19

Which of the following are usually known with a high level of confidence at the beginning of a project?

Accepted Answer

A)  The number of units that will be sold. 
B)  The price per unit that will result in the desired number of units sold. 
C)  Tax rates and depreciation rates. 
D)  None of the above.

Question 20

Break-even NPV means that the expected rate of return on a project is equal to the required rate of return.

Accepted Answer

A) True 
 B)False

Exam 13: Risk Analysis and Project Evaluation

One advantage of simulation is that it can differentiate between unsystematic and systematic risk.

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

If the worst case scenario for a project results in an NPV of zero, the project should be accepted.

An appropriate tool to analyze the interaction of various value drivers for Destroya Extermination Services would be

Variable cost for Light.com's fluorescent tubes is $12.50, the tubes are sold over the internet to businesses and organizations for $20.00 each. Fixed costs are $7,500,000. What is the break-even quantity for the fluorescent tubes?

When using simulation to analyze a large capital project, the decision rule is

________ is a method of quantifying uncertainty without having to estimate probabilities.

February sales for Ted's Variety Store equal $100,000, variable costs equal $60,000, fixed costs, including depreciation of $20,000, total $60,000.

Briefly distinguish between sensitivity analysis, scenario analysis, and simulation.

Which of the following is considered the major risk when analyzing projects in a multinational environment?

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

Bay State Tubing has a large manufacturing facility in Central America is particularly concerned that a tariff of unknown size will be imposed on goods reimported from that region. The type of risk analysis that accounts for various levels of tariff is

What is the expected NPV of the project if the option to expand is not considered?

Sensitivity analysis is the form of risk analysis

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

________ is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.

Which of the following are usually known with a high level of confidence at the beginning of a project?

Break-even NPV means that the expected rate of return on a project is equal to the required rate of return.