FIN 321 SB 10

Which of the following activities most accurately describes the technique of scenario analysis?

Examine changes to NPV due to changes to a set of consistent, interrelated variables

A diagram of sequential decisions and possible outcomes that managers use to decide whether to expand is called a

decision tree

The percentage change in profits given a 1% change in sales is a firm's

degree of operating leverage

When considering the option to abandon, it is important to recognize that tangible assets are ___ to sell than intangible ones.

easier

The analysis done to show the effects on project profitability of changes in sales, costs, and other variables is called

sensitivity analysis

A firm with high operating leverage will see that _____ changes in sales will lead to ______ changes in profits.

small, large

Project analysis given different combinations of variables is called:

scenario analysis

Which of the following statements are true?

- A higher initial investment requires a higher level of sales to achieve NPV break-even. - A higher project depreciation means lower sales are required to achieve NPV break-even. - A higher firm tax rate means higher sales are required to achieve NPV break-even.

Which of the following statements are true? NPV

- A higher project depreciation means lower sales are required to achieve NPV break-even. - A higher firm tax rate means higher sales are required to achieve NPV break-even. - A higher initial investment requires a higher level of sales to achieve NPV break-even.

The ______ the degree of operating leverage, the _____ the sensitivity of profits to variation in sales and the ______ the risk of the project.

- lower; lower; lower - higher; higher; higher

Some of the reasons that managers may bias their project cash flow forecasts upward are:

- to gain approval of their division's projects at the expense of other divisions' projects - to gain approval of projects that will grow their responsibilities and power - they are too optimistic about their project's chances of success

XYZ Corporation is planning a $4 million investment with net cash flows expected to be 0.12 × sales unit − $1 million per year for 6 years. The discount rate is 10%. What is the break-even sales unit to break even in terms of NPV? (Hint: The 6-year annuity factor at a 10% discount rate is 4.355.)

4.355 × (0.12 × sales − $1 million) = $4 million. 0.5226 × sales − $4.355 million = $4 million. Sales = ($4 million + $4.355 million)/0.5226 = $15.987 million.

Excellent Corporation is evaluating a $450 million investment. If the cost of capital is 10%, the 6-year annuity factor is 4.3553. The net cash flow (in millions of dollars) in years 1-6 equals 1.75 × sales unit − $6.25 million. What is the break-even sales unit to break even in terms of NPV?

62.62; Reason: 4.3553 * (1.75* sales unit - 6.25) = 450 7.621 * sales unit - 27.22 = 450 sales unit =450 + 27.22 / 7.621 sales unit needed to break even in terms of NPV = 62. 62

Sensitivity analysis consists of which of the following activities?

Change the forecast of one cash flow variable at a time to observe effect on NPV.

Which of the following indicates the correct equation for calculating the degree of operating leverage?

DOL= %change in profits/%change in sales DOL= 1+(fixed cost/profits)

Which of the following is the best definition of the firm's capital budget?

It is the list of the firm's planned investment projects for the coming year

Which of the following is a solution to the problem of inconsistency in project forecasts?

Provide managers with a common set of economic and firm-specific indicators upon which to base forecasts

Which of the following best describes the NPV break-even point?

The level of project sales at which the NPV turns from negative to positive.

Which of the following accurately describes the accounting break-even point?

The level of sales at which profits are zero. The level of sales at which total revenues equal total costs.

The real option to expand helps to mitigate which of the following project risks faced by a firm?

The risk of making a large initial investment in full production for a project with uncertain cash flows.

What can management do to help ensure that they have a real option to abandon a project while maintaining a positive NPV?

Use project assets that are tangible and have a high value in secondhand markets.

Real options include the option to (choose 4)

abandon modify expand postpone

The ______ break-even point is the level of sales at which profits are zero, or, equivalently, at which total revenues equal total costs.

accounting

Managers ask "what if" questions related to the factors that can increase or reduce project cash flows because______.

changes in cash flows change NPV and ay change the acceptability of a project

True or false: Once the initial discounted cash flow analysis has been completed and a project has been budgeted and initiated, managers are no longer concerned about project cash flow forecasts.

false; changes in cash flow forecasts that affect NPV may occur at any time and must be addressed

A firm is said to have high operating leverage, if

fixed costs are high relative to variable costs

When manufacturers realize they are dependent on a single source of raw materials, they may seek out __ production facilities.

flexible

A firm that is able to vary its output mix as demand changes is said to have

flexible production facilities

If a large proportion of costs is fixed, a lack of sales will have a ______ effect on profits than if a smaller proportion of costs is fixed.

greater

Obtaining unbiased cash flow forecasts can be difficult because senior managers sometimes increase the ____________ for capital expenditures.

hurdle rate

A project's accounting break-even point will have a ______ NPV.

negative; Accounting break-even analysis does not include the opportunity cost of capital; therefore, when the opportunity cost of capital is included, the level of sales that leads to the accounting break-even point would have a negative NPV.

Accounting break-even analysis does not include the _____ of a project; therefore, NPV break-even analysis should be used instead.

opportunity cost of capital

Unbiased cash flow forecasts are often difficult to obtain due to ________, which, despite causing higher projected cash flows, can also increase effort, commitment, and persistence from employees.

overoptimism

Options to invest in, modify, postpone, or dispose of a capital investment project are known as

real options

The make-or-break variable most commonly used in break-even analysis is ______; however, ______ can also be used to help a firm understand the break-even point.

sales volume; costs

___ costs change as the level of output changes.

variable

It may make sense to time the decision to implement small positive NPV projects if their input prices are highly

volatile, variable, erratic, or unpredictable

The timing real option is really an option to Blank

wait until the firm has additional information about project success before investing

A firm's capital budget is generally drawn up on a _____ basis.

yearly