CF 7

The present value break-even point is superior to the accounting break-even point because:

present value break-even covers the economic opportunity costs of the investment

The point where a project produces a rate of return equal to the required return is known as the:

present value break-even point

An analysis of what happens to the estimate of the net present value when you examine a number of different likely situations is called _____ analysis.

scenario

An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis.

sensitivity

To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably conduct _____ analysis.

sensitivity

An investigation of the degree to which NPV depends on assumptions made about any singular critical variable is called a(n):

sensitivity analysis

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.

simulation

The type of analysis that is most dependent upon the use of a computer is _____ analysis.

simulation

Conducting scenario analysis helps managers see the:

potential range of outcomes from a proposed project

The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even.

present value

Sensitivity analysis provides information on:

Both whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive; and the need for additional information as it tests each variable in isolation

Which of the following statements are correct concerning the accounting break-even point? I. The net income is equal to zero at the accounting break-even point. II. The net present value is equal to zero at the accounting break-even point. III. The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin. IV. The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin.

I and III only

Which of the following statements are correct concerning the present value break-even point of a project? I. The present value of the cash inflows equals the amount of the initial investment. II. The payback period of the project is equal to the life of the project. III. The operating cash flow is at a level that produces a net present value of zero. IV. The project never pays back on a discounted basis.

I and III only

The timing option that gives the option to wait: I. may be of minimal value if the project relates to a rapidly changing technology. II. is partially dependent upon the discount rate applied to the project being evaluated. III. is defined as the situation where operations are shut down for a period of time. IV. has a value equal to the net present value of the project if it is started today versus the net present value if it is started at some later date.

I, II and IV only

Fixed costs: I. are variable over long periods of time. II. must be paid even if production is halted. III. are generally affected by the amount of fixed assets owned by a firm. IV. per unit remain constant over a given range of production output.

I, II, and III only

As the degree of sensitivity of a project to a single variable rises, the:

more attention management should place on accurately forecasting the future value of that variable

Which of the following statements concerning variable costs is (are) correct? I. Variable costs minus fixed costs equal marginal costs. II. Variable costs are equal to zero when production is equal to zero. III. An increase in variable costs increases the operating cash flow.

II only

The approach that further attempts to model real world uncertainty by analyzing projects the way one might analyze gambling strategies is called:

Monte Carlo simulation

Monte Carlo simulation is:

more complex than sensitivity or scenario analysis

In order to make a decision with a decision tree:

one starts farthest out in time to make the first decision

The sales level that results in a project's net income exactly equaling zero is called the _____ break-even.

accounting

In a decision tree, the NPV to make the yes/no decision is dependent on:

all cash flows and probabilities

Sensitivity analysis evaluates the NPV with respect to:

all of these

The potential decision to abandon a project has option value because:

all of these

Theoretically, the NPV is the most appropriate method to determine the acceptability of a project. A false sense of security can overcome the decision-maker when the procedure is applied properly but the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by:

all of these

Variable costs:

all of these

Which of the following are hidden options in capital budgeting

all of these

In the present-value break-even the EAC is used to:

allocate the initial investment at its opportunity cost over the life of the project

Fixed costs:

are constant over the short-run regardless of the quantity of output produced

Scenario analysis is different than sensitivity analysis:

because several variables are changed overtime

In a decision tree, caution should be used in the analysis because:

both early stage decisions are probably riskier and should not likely use the same discount rate; and if a negative NPV is actually occurring, management should opt out of the project and minimize the firm's loss

Which of the following are types of break-even analysis?

both present value break-even; and accounting profit break-even

An analysis of the relationship between the sales volume and various measures of profitability is called _____ analysis.

break-even

Variable costs:

change in direct relationship to the quantity of output produced

Sensitivity analysis is conducted by:

changing the value of a single variable and computing the resulting change in the current value of a project

All else constant, as the variable cost per unit increases, the:

contribution margin decreases

Sensitivity analysis helps you determine the:

degree to which the net present value reacts to changes in a single variable

All else constant, the accounting break-even level of sales will decrease when the:

depreciation expense decreases

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

direct labor costs

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

expand

Including the option to expand in your project analysis will tend to:

increase the net present value of a project

Fixed production costs are:

measured as cost per unit of time

The investment timing decision relates to:

the decision as to when a project should be started

All else equal, the contribution margin must increase as:

the variable cost per unit declines

Simulation analysis is based on assigning a _____ and analyzing the results.

wide range of values to multiple variables simultaneously