CH 11 HW

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What will the shapes of total revenue and total costs be on a graph that depicts number of units on the x-axis and dollar amount (revenues and cost) on the y-axis?

Both the total revenue and total cost curves will slope upward.

The ______ break-even is the sales level that results in a zero NPV.

financial

For all practical purposes, it is easier to _____.

increase operating leverage than to decrease it

As a particular matter, it is easier to ______ operating leverage than it is to ______ it.

increase, decrease

Which of the following is a fixed cost for a tire manufacturing business?

Manager's salary of $98,000/year Building rent of $10,000/month

The situation that occurs when a business cannot raise financing for a project under any circumstances is called _____ rationing.

hard

In a competitive market, positive NPV projects are:

uncommon

Which of the following represents the accounting profit break-even point?

(Fixed costs + Depreciation)/Contribution margin

Broadband, Inc. has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $1,000,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of $_____ as the base case.

1,000,000

Rank each of the following in order from most important to least important as they pertain to project analysis:

1. cash flow 2. accounting income

What is a sunk cost?

A cost incurred in the past that is irrelevant to the capital investment decision process.

Which of the following defines the contribution margin per unit? Ignore taxes.

Contribution Margin per Unit = Sales price - Variable cost per unit

The _____ is the percentage change in operating cash flow relative to the percentage change in quantity sold.

DOL

Which of the following is the correct equation for the degree of operating leverage?

DOL = 1 + FC/OCF

In the context of capital budgeting, what does sensitivity analysis do?

It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.

Which of the following costs relating to a doctor's office are variable costs?

Medical supplies Lab reports for patients

Which of the following equations correctly relates OCF to sales volume?

OCF = (P − v) × Q − FC

Suppose Price per Unit is $6, variable cost per unit is $2, fixed costs are $400 and the depreciation allowance per year is $500. The relationship between operating cash flow (OCF) and sales volume (Q) can be expressed as:

OCF = −400 + 4*Q

_______ value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.

Present

Which of the following statements is true in the context of comparing accounting profit and present value break-even point?

Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.

Which of the following is a fixed cost for a garment manufacturing business?

Rent for the building

Which of the following is an example of a sunk cost?

Research and development expense incurred in the past

_______ analysis involves estimating the best-case, worst-case, and base-case cash flows and calculating the corresponding NPVs.

Scenario

________ analysis is the investigation of what happens to NPV when only one variable is changed.

Sensitivity

______ analysis uses a combination of scenario and sensitivity analysis.

Simulation

Which of the following are examples of variable costs for a grocery store?

The cost of labor to stock shelves. The cost of vegetables.

Which of the following are examples of variable costs for a car manufacture?

The cost of steel Labor costs Freight costs

Which of the following are true about variable costs?

The variable cost per unit may remain constant as the number of units produced increases. Total variable costs increase as the total number of units produced increases.

What is the purpose of accounting profit break-even analysis?

To determine the level of sales at which profits are equal to zero.

What is the relationship between variable costs and output?

Total variable costs are directly related to the level of output.

True or false: Ultimately, we are more interested in cash flow than accounting income.

True

True or false: When a business does hard rationing, the firm's DCF analysis breaks down.

True

When McDonald's decides to build a new restaurant at a particular location, which of the following competitors might also be tempted to locate new facilities in the same area?

Wendy's Burger King

Financial break-even is the sales level that results in _____.

an NPV of zero

From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage _____.

as low as possible

When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in _____.

asking what-if questions scenario analysis

To be considered good, projected cash flows should _____ actual cash flows.

be close to

A firm will start generating positive accounting profits _____.

beyond the break-even sales point

The sales level that results in a zero operating cash flow is called the _____

break-even

A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project _____.

cannot be observed

The sales level that results in a zero operating cash flow is called the _____ break-even.

cash

Evans Corporation estimated that the cash flows last year from a particular project would be $40,000, but the actual cash flow turned out to be $37,500. Evans Corporation should ______.

not expect cash flow estimates to be exactly right every time

The degree to which a firm or project relies on fixed costs is called the _____ leverage.

operating

The degree to which a firm or project relies on fixed costs is called the ______ leverage.

operating

A situation in which a firm has positive NPV projects but cannot find the necessary financing is called capital _______.

rationing

West Corporation estimated cash flows for a project, evaluated those cash flows using NPV, and determined that the project was acceptable. Unfortunately West Corporation lost money on the project. This may have been avoided had they assessed the ______ of the cash flow estimates.

reliability

A fixed cost is a cost that _____.

remains constant as the level of business activity changes

The Omega Division of Alpha Corporation has been allocated $4 million for capital spending but has identified $4.6 million in positive NPV projects. Omega's manager thinks he can convince the company to fund the additional $0.6 million dollars because Omega uses _______ rationing to control overall spending.

soft

The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting is called ______ rationing.

soft

Capital rationing exists when a company has identified positive NPV projects but can't find _____.

the necessary financing

The contribution margin per unit will increase if _____.

the sales price per unit increases while the variable cost per unit decreases

A firm will start generating profits when ___.

the total number of units sold exceeds the accounting break-even point

The ______ cost is equal to the quantity of output times the cost per unit of output.

variable

The basic approach to evaluating cash flow and NPV estimates involves asking _______ -if questions

what

The basic approach to evaluating cash flow and NPV estimates involves asking ______.

what-if questions

An accounting break-even point of 1,000 units means that ____.

when the firm sells 1,000 units, profits will be equal to zero

An accounting break-even point of 2,000 means the firm _____.

will start generating profits if it sells more than 2,000 units

A firm with higher operating leverage will have ______ fixed costs relative to a firm with low operating leverage.

high

A firm with higher operating leverage will have _____ (low/high) fixed costs relative to a firm with low operating leverage.

high

Which of the following are examples of fixed costs for a car repair shop performing oil changes and other repairs?

Salary for the shop manager Insurance for the shop Monthly rent for the shop

In a graph with output on the x-axis and dollar amount (for costs and revenues) on the y-axis, what will be the shapes of variable and fixed costs?

Variable costs will be upward sloping while fixed costs will be parallel to the x-axis

A contribution margin of $35 means that _____.

each sale of an additional unit will contribute $35 toward paying fixed costs

Contribution margin refers to the contribution made toward paying _____ by each additional unit sold.

fixed costs

The possibility that errors in projected cash flows will lead to incorrect decisions is called ______, or estimation risk.

forecasting

In a simulation, the average NPV and the spread of NPVs around the average are determined by _____.

repeated random drawings

Corporate managers care about the break-even point because it indicates the level to which _____ can fall before a project will start losing money.

sales

When using _______________ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable.

sensitivity analysis

The possibility that errors in projected cash flows will lead to incorrect decisions is known as _____.

forecasting risk estimation risk


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