FIN 3403Chapter 11 Conceptual
Assume you graph a projects net present value given the sales quantities. Which of the following is correct regarding the resulting function
The slope of the function measures the sensitivity of the net present value to a change in sales quantity
Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the
accuracy of the projected cash flows
Fixed costs
are constant over the short-run regardless of the quantity of output produced
Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as
capital rationing
When operating cash flow of a project is equal to zero, the project is operating at the
cash break even point
which of these is most associated with an IRR of -100 percent
cash break even point
Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $320,000. Annual sales are estimated at 589,000 and the tax rate is 34 percent. The NPV is negative 320,000. Based on this, the project is expected to operate at the
cash break-even point
Theresa is analyzing a project that currently has projected NPV of zero. Which of the following changes that she is considering most apt to cause that project to produce a pos npv instead?
decrease the labor hours per unit produced
which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold
degree of operating leverage
Sensitivity Analysis determines the
degree to which the net present value reacts to changes in a single variable
Scenario analysis is defined as the
determination of changes in NPV estimates when what-if questions are posted
Given the following, which feature identifies the most desirable level of output for a project
discounted payback period equal to the project's life
The CFO of Edward's food distributor is continually receiving capital funding request from its division managers. These requests are seeking funding for positive npv projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently the company is
facing hard rationing
Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points?
financial
You would like to know the minimum level of sales that is needed for a project to be accepted based on its NPV. To determine that sales level you should compute
financial break even point
Which of the following represents the level of output where a project produces a rate of return just equal to its requirement
financial break-even
Which of the following variables will be forecast at their highest expected level under a worst case scenario?
fixed and variable costs
Operating leverage is the degree of dependence a firm places on its
fixed cost
As the degree of sensitivity of a project to a single variable rises, the
greater is the importance of accurately predicting the value of that variable
PC enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing
hard rationing
Which of the following characteristics best describes a project that has a low degree of op leverage
high variable costs relative to the fixed costs
Scenario analysis is best suited to accomplishing which of the following when analyzing a project?
identifying the potential range of reasonable outcomes
Forecasting risk is defined as the possibility that
incorrect decisions will be made due to erroneous cash flow projections
Which of these combinations must increase the contribution margin?
increasing the sales price and decreasing the variable cost per unit
Webster iron works started a new project last year. As it turns out, the project has been operating at its accounting break even level of output and is now expected to continue at the level over its lifetime. Given this, you know that the project
is operating at a higher level than if it were operating at its cash break even level
the base case values in scenario analysis are the values considered to be the most
likely to occur
You are considering a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should
lowering the degree of op leverage
Steve wants to sponsor a one-week customer appreciation sale where the firm offers to sell additional units of a product at the lowest price without negatively affecting the firms profits. which of the following represents the price that should be charged of the additional units during this sale
marginal cost
The change in variable costs that occurs when production is increased by one unit is referred to as the
marginal cost
The president of Global Wholesalers would like to offer special sale prices to the firms best customers under the following terms
marginal cost of all variable inputs
Which of the following will best reduce the risk of a project by lowering the degree if op leverage
subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
A project has a payback period that exactly equals the project's life. The project is operating at
the accounting break-even point
Which of the following will be used to computation of the best-case analysis of a proposed project?
the lowest variable cost per unit that can reasonably be expected
Which of the following characteristics relates to the cash break-even point for a given project
the project never pays back
Variable costs can be defined as the costs that
vary directly with sales
Simulation analysis is based on assigning a ___ and analyzing the results
wide range of values to multiple variables simultaneously
When you assign the highest anticipated sales price and the lowest anticipated costs to a project, you are analyzing the project under the condition known as
worst case scenario analysis
The change in revenue that occurs when one more unit of output is sold is referred to as
marginal rev
By definition, which one of the following must equal zero at the accounting break-even point?
net income
By definition, which of the following must equal zero at the cash break-even point?
operating cash flow
Which of the following are inversely related to variable costs per unit?
operating cash flow per unit and contribution margin per unit
the degree of op lev is equal to
1 plus FC/OCF
A degree is which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes
sales price per unit
The contribution margin per unit is equal to the
sales price per unit minus the variable cost per unit
Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. What type of analysis is steve using?
scenario analysis
Which of the following statements concerning scenario analysis is correct?
scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions
An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis
sensitivity
What type of analysis identifies the variable, or variables that are most critical to the success of a particular project?
sensitivity
An analysis that combines scenario analysis with sensitivity analysis is called _____ analysis
simulation
Which of the types of analysis is the most complex to conduct
simulation
Brubaker & Goss has received request for capital investment funds for next year from each of its 5 divisions...profitability index of each project since the company has insufficient funds to fulfill all of the requests
soft rationing
The procedure of allocating a fixed amount of funds for capital spending to each business unit is called
soft rationing
Uptown Promotions has three divisions. As part of the planing process, the CFO requested that each division submit its capital budgeting proposals for next Year.... even though the firm could afford additional investments
soft rationing
Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?
IRR and net income
Assume both the discount rate and tax rates are positive values. At the financial break-even point, the
IRR equals the required return
a firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspects of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?
Sensitivity analysis; to identify the key variable that affects a project's profitability
A project has a projected IRR of negative 100 percent. Which of the following statements must also be true concerning this project
The NPV of the project is negative and equal to the initial investment