Chapter 12

A firm that has zero fixed costs will have a degree of cash flow operating leverage equal to one.

True

A project with a higher proportion of fixed costs will have cash flows and accounting profits that are more sensitive to changes in revenues than an otherwise identical project with a lower proportion of fixed costs.

True

An increase in the proportion of a project's costs that are fixed will increase the degree of operating leverage for the project.

True

Break-even analysis tells us how many units must be sold in order for a project to break even on a cash flow or an accounting basis.

True

Depreciation and amortization can be considered a fixed cost of the firm, for accounting break-even purposes.

True

Distinguishing between fixed and variable costs will enable one to calculate the sensitivity of EBITDA to changes in revenue.

True

If a project fails to break even from a pretax operating cash flow perspective, then the firm is going to put more cash into the project to keep it going.

True

If there is no uncertainty regarding costs, volatility in pretax operating cash flows and accounting operating profits will be driven entirely by changes in revenue and operating leverage.

True

Sensitivity analysis involves examining the sensitivity of the output from an analysis to changes in individual assumptions.

True

Taxes do not enter into the equation for the degree of cash flow of operating leverage because both fixed costs and pretax operating cash flows are measured on a pretax basis.

True

The NPV of a project will equal $0 when the present value of the annual FCFs from the project, PV (FCF), equals the present value of net nonrecurring investments.

True

The break-even point increases, if fixed costs associated with a project increases.

True

The crossover level of unit sales is the level at which one fixed/variable cost combination of production will begin to generate higher levels of operating cash flows than another fixed/variable cost combination of production.

True

The degree of pretax cash flow operating leverage will change for different levels of revenue.

True

Which of the following project risk analyses is best able to analyze the effect of a single set of circumstances, with correlated inputs, on the NPV of a project?

scenario analysis

Astroscope Tours finds that if it were to increase its price by 10 percent, it would have a 6 percent reduction in the NPV of its new 3-Hour Tour. Considering other things to be unchanged, Astroscope's analysis could be described as:

sensitivity analysis

If a firm wanted to find the effect of a change in the variable cost per unit of production on the net present value of a project, then the firm might perform:

sensitivity analysis

Sancore Inc. decided to invest in a project costing $35,000. It is assumed that all of $8,000 working capital will be recovered at the end of the project, which is four years. The opportunity cost of capital is 10%. Compute the present value of net non-recurring investment of the project. (Do not round intermediate calculation. Round the final answer to the nearest dollar.)

$46,713

Vertent Manufacturing makes only one product which sells for $6each. At a production and sales level of 20,000 units, their total variable costs are $40,000 and total fixed costs are $36,000. If they increase their production and sales to 24,000 units, what will be Vertent Manufacturing's pretax operating cash flows (EBITDA)?

$60,000

Which of the following statements is true about the economic break-even point?

It considers the entire life of the project.

Which of the following mathematical expressions is used to calculate the economic break-even point?

(Revenue - Variable cost) / Unit contribution

Which of the following mathematical expressions is used to calculate the degree of pretax cash flow operating leverage?

1 + (FC / EBITDA)

OutCinq manufactures snow boards. The firm has fixed costs of $1,500,561. The snow boards sell for $235 each and have a variable cost of $92 each. What is the pretax operating cash flow break-even point for OutCinq? (Round to the nearest unit)

10,493 units

If the degree of accounting operating leverage is 1.3 for a firm, then a 10 percent increase in revenue should drive a:

13% increase in EBIT.

Which of the following project risk analyses is best able to analyze the effect of a single input, uncorrelated with other inputs, on the NPV of a project?

Sensitivity analysis

Revenue minus variable and fixed costs best describes:

EBITDA

A synonym for pretax operating cash flow is EBIT.

False

EBITDA is more sensitive to changes in revenue than EBIT.

False

Operating leverage is a measure of the sensitivity of net income to changes in revenue.

False

Operating profits and operating cash flow describe the same item.

False

Simulation analysis can be considered the same as a "best-case"/"worst-case" analysis.

False

The crossover level of unit sales can be calculated for any two alternatives that have the same level of operating leverage.

False

The per-unit contribution margin is defined as the total sales price less its total variable cost.

False

Total variable costs for a firm do not vary directly with the number of units sold.

False

Operating leverage of a project helps to determine the change in net income given a change in revenues.

False, Operating leverage of a project helps to determine the change in net income given a change in revenues.

Which of the following statements is true of the economic break-even point?

It is the number of units that must be sold each year during the life of a project so that the NPV of a project equals $0.

_____ is a measure of the sensitivity of EBITDA or EBIT to changes in revenue.

Operating Leverage

Which is the term used to define how many units must be sold for pre-tax operating cash flow to be equal to zero?

Pre-tax operating cash flow break-even point

Under which of the following analyses, an analyst might examine how a project's NPV changes, if there is a decrease in the value of individual cash inflow assumptions or an increase in the value of individual cash outflow assumptions?

Sensitivity analysis

Which of the following statements is true?

The higher the proportion of fixed costs to variable costs in a project, the greater the sensitivity of pre-tax operating cash flows to changes in revenue.

Compared to an identical project with a lower proportion of fixed costs, a project with a higher proportion of fixed costs will have:

a higher degree of sensitivity of EBITDA to a change in revenues.

The degree of pretax cash flow operating leverage provides us with:

a measure of how sensitive pretax operating cash flows are to changes in revenue.

A firm is considering two distinct set of circumstances that assume high inflation and low inflation. In the high inflationary set of circumstances, the price per unit will be affected as well as the variable and fixed costs. If the low-inflation set of circumstances is considered the baseline, then the analysis concerning the high inflationary circumstances could be considered:

a scenario analysis

At times, when a firm is considering an alternative such that a set of variables affecting a project are interrelated, then analysis that considers this interrelation could be performed. This is called:

a scenario analysis.

If a firm were interested in knowing the effect of a single input change on the net present value of a project, then the firm would most likely want to perform:

a sensitivity analysis

If a firm is interested in the distribution of the NPV for a project that it is considering, then the firm should be most interested in:

a simulation analysis

Ottomony has analyzed a new type of all-in-one retail center where the NPV of the project has an expected value with a distribution that yields a standard deviation of $25 million. Ottomony came to this conclusion by analyzing the individual input distributions for the project. This analysis is called:

a simulation analysis

An analysis in which each of the inputs and assumptions for a project takes on a separate assumed distribution whereby a computer draws on each of those input and assumption distributions to create a distribution for the NPV of the entire project is called:

a simulation analysis.

EBITDA stands for:

earnings before interest, taxes, depreciation, and amortization.

The profit that exceeds the opportunity cost of the capital invested in a project is called:

economic profit

Depreciation and amortization are treated like fixed costs:

in the calculation of the degree of accounting operating leverage.

The degree of a firm's pretax cash flow operating leverage is a measure of the sensitivity of its cash flow from operations (EBITDA) to changes in:

its revenues

Economic break-even point is the number of units that must be sold each year during the life of a project so that the _____ of the project equals $0.

net present value

In order to calculate a firm's pretax operating cash flows (EBITDA) break-even point, we must divide its fixed costs by:

per-unit contribution

Another name for EBITDA is:

pretax operating cash flow

If a firm is about to operate in an environment in which there will be a great deal of variability in the level of revenues, then the firm:

should structure its cost structure to have low fixed costs and consequently higher per unit variable costs.

The analytical method that uses a computer to quickly examine a large number of scenarios and obtain probability estimates for various values in a financial analysis is called:

simulation analysis

The difference between revenue and variable cost is called:

total contribution.

Scenario analysis can help a firm to:

understand the degree of uncertainty that a different set of project-affecting circumstances may hold.