Quiz 10-14 Intermediate Financial Management

The change in costs that occurs when there is a small change in output

Marginal (incremental cost)

The cost to produce one more unit

Marginal cost *Same as variable cost per unit

The required return is based on the

Risk of the cash flows

Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is cost of preferred stock?

Rp = (.075 x 100)/$52 = 14.42 percent

Grill Works are More has 8 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock?

Rp = (0.08 x $100)/$49 = 16.33 percent

Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine?

Sale price + (Book value - Sale price) × T

New Town Instruments is analyzing a proposed project. The company expects to sell 2,100 inits, + or - 4 percent. The expected variable cost per unit is $270 and the expected fixed costs are $548,000. Cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is $118,000. The sales price is estimated at $789 per unit, plus or minus 5 percent. What is the sales revenue under the worst case scenario?

Sales in worst case scenario sale units (2100*96%) = 2016 sale price (789*95%) = 749.55 sales revenue (2016*749.55) =$1,511,092.80

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. A. Sales price per unit. B. Management salaries. C. Variable labor costs per unit. D. Initial fixed asset purchases. E. Fixed costs.

Sales price 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. Which type of analysis is Steve using?

Scenario Analysis

The determination of what happens to NPV estimates when we ask what if questions

Scenario analysis

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. A. Forecasting B. Scenario C. Sensitivity D. Simulation E. Break-even

Sensitivity

The investigation of what happens to NPV when only one variable is changed

Sensitivity analysis

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero

The higher the DOL,

the greater the variability in operating cash flow

The higher the fixed costs,

the higher the Degree of Leverage

Variable costs can be defined as the costs that:

vary directly with sales.

When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

worst case scenario analysis

The Fluffy Feather sells customized handbags. Currently, it sells 18,000 handbags annually at an average price of $89 each. It is considering adding a lower-priced line of handbags that sell for $59 each. The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?

$146,000 Sales = (7,000 × $59) + (-3,000 × $89) = $146,000

Morris Motors just purchased some MACRS 5-year property at a cost of $216,000. Which one of the following will correctly give you the book value of this equipment at the end of year 2?

$216,000 × (1 - 0.20 - 0.32)

Crafter's Supply purchased some fixed assets 2 years ago at a cost of $38,700. It no longer needs these assets so it is going to sell them today for $25,000. The assets are classified as 5- year property for MACRS. What is the net cash flow from this sale if the firm's tax rate is 30 percent? Year 1 : 20.00% Year 2: 32.00% Year 3: 19.20% Year 4: 11.52% Year 5: 11.52% Year 6: 5.76%

$23,072.80 Book value2 = $38,700 × (1 - 0.20 - 0.32) = $18,576 Aftertax salvage = $25,000 + [($18,576 - $25,000) × 0.30] = $23,072.80

Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project?

$43,480 (OCF = ($145,000 - $94,000)(1 - 0.32) + ($110,000/4)(0.32) = $43,480)

Degree of Leverage

1 + (FC / OCF)

Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.51 million. What amount should be used as the initial cash flow for this project?

-$1,850,000 (CF0 = -$340,000 - $1,510,000 = -$1,850,000)

Market value of debt

-D (# of outstanding bonds times bond price)

You purchase equipment for $100,000, and it costs $10,000 to have it delivered and installed. Based on past information, you believe that you can sell the equipment for $17,000 when you are done with it in 6 years. The company's marginal tax rate is 40%. What is the depreciation expense each year and the after-tax salvage in year 6 for each of the following situations?

-Depreciation: (110,000-17,000)/6 =15,500 -Book Value: *Initial cost - accumulated depreciation [110,000-(6*15,500)]=17,000 -After-tax salvage: *Salvage - T(Salvage-BV) 17,000 - .40(17,000-17,000)= 17,000

Market value of equity

-E (# of outstanding shares times price per share)

Suppose you have a market value of equity equal to $500 million and a market value of debt equal to $475 million. What are the capital structure weights?

-E: $500 million -D: $475 million -V: (500 + 475) =975million Weighted: We: 500/975 = .5128 Wd: 475/975 = .4872

Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, plus or minus 2 percent. a) What is the sales revenue under the worst case scenario? b) What is the contribution margin per unit under the best case scenario? C)The company is conducting a sensitivity analysis with fixed costs of $590,000. What is the operating cash flow based on this analysis? D)What is the amount of the total costs per unit under the worst case scenario?

-Sales; Worst case = (2,100 0.95) ($750 .98) = $1,466,325 -Contribution margin; best case = ($750 1.02) - ($260 0.96) = $515.40 -OCF {[(755 - $260) 2,100] - $589,000} {1 - 0.35} + ($129,000 0.35) = $337,975 -Total costs per unit; worst case = [($2,100 0.95) (260 1.04) + ($589,000 1.04)]/(2,100 0.95) = $577.45

Your firm pays $3,000 per month in fixed costs. You also pay $15 per unit to produce your product. -What is your total cost if you produce 1,000 units? -What is the average cost -What is the marginal cost

-Total costs: 3000 + (1000*15) =18000 -Average costs: 18000/1000 = 18 -Marginal cost (Price) = 15

Market value of the firm

-V (D+E)

Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.2 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

2.25 WACC = 0.08 = [We x 0.152] +[(1 - We) x 0.048)] We = 0.3077; Wd = 1 - We = 0.6923 Debt-equity ratio = 0.6923/0.3077 = 2.25

Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest annually. These bonds have a face value of $1,000 and a current market price of $1,040. What is the company's aftertax cost of debt if its tax rate is 32 percent?

3.78 percent Enter: N= 13 PV = -1,040 PMT = 60 FV = 1,000 Solve for: I/Y = 5.5597 Aftertax Rd = 0.055597 x (1 - 0.32) = 3.78 percent

Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital?

45.16 percent Debt: 1200 x $990 = $1,1880,000 Preferred: 2,500 x $28 = $70,000 Common: 28,000 x $37 = $1,036,000 Total = $2,294,000 Weight of Common Stock = 1,036,000/2,249,000 = 45.16

Handy Man, Inc. has zero coupon bonds outstanding that mature in 8 years. The bonds have a face value of $1,000 and a current market price of $640. What is the company's pre-tax cost of debt?

5.66 percent Enter: N = 8 x 2 = 16 (zero coupon bonds are semi-annual) PV = -640 FV = 1000 Solve for: I/Y = 2.82 x 2 = 5.66

Electronic Galore has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital?

54 percent Debt: 40,000 x $1000 x 1.06 = $42.4m Common: 950,000 x $38 = $36.1m Total: 78.5m Weight of Debt = $42.4m/$78.5m = 54 percent.

R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1000 per bond. The bonds carry a 7 percent coupon, pay interest semi-annually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital?

6.2 percent Debt: 7,500 x $1,000 x 0.98 = $7.35m Common: 250,000 x $28 = $7.00m Total: $14.35m Re = ($1.55/$28) + 0.02 = 0.075357 Enter: N = 7.5 x 2 = 15 PV = -980 PMT = 70/2 = 35 FV = 1,000 Solve: I/Y: 3.675829 x 7.35166 WACC = ($7m/$14.35m)(0.075357) + ($7.35m/$14.35m)(0.0735166)(1 - 0.34) = 6.2 percent

Mangrove Fruit Farms has $200,000 bond issue outstanding that is selling at 92 percent of face value. The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding. The preferred stock has a market price of $35 a share compared to a price of $24 share for the common stock. What is the weight of preferred stock as it related to the firm's weighted average cost of capital?

8.80 percent Debt: $200,000 x 0.92 = $184,000 Preferred: 1500 x $35 = $52,500 Common: 15,000 x $24 =360,000 Total = 596,500 Weight of Preferred Stock = $52,500/$596,500 = 8.80 percent

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm? A. net present value B. discounted payback C. internal rate of return D. profitability index E. payback

A

Net spending on fixed assets

Capital spending

A new product requires an initial investment of $5 million and will be depreciated to an expected salvage of zero over 5 years The price of the new product is expected to be $25,000, and the variable cost per unit is $15,000 The fixed cost is $1 million -What is the accounting break-even point each year? -What is the operating cash flow at the accounting break-even point -What is the cash break-even quantity

Accounting Break Even (Net income = 0) *Q= (FC+D) / (P-V) Depreciation: -5,000,000 / 5 = 1,000,000 FC= 1,000,000 P=25,000 V=15,000 Q= (1,000,000 + 1,000,000) / (25,000-15,000) Q=200 Cash Flow: OCF = (S - VC - FC - D) + D (200*25,000-200*15,000-1,000,000) OCF = 1,000,000 Cash-break even quantity: (OCF = 0) Q = (OCF + FC) / (P - v) Q= (0+1,000,000) / (25,000 - 15,000) = 100

Purchases of fixed assets minus the sale of fixed assets

Capital spending

Gateway Communications is considering a project with an initial fixed asset cost of $2.872 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $714,000 a year. The tax rate is 35 percent. The project will require $52,000 of inventory which will be recouped when the project ends. What is the net present value at the required rate of return of 13.6 percent?

Answer: Initial cash flow = -$2,872,000 - $52,000 = -$2,924,000 OCF = $714,000(1 - 0.35) + ($2,872,000/10)(0.35) = $564620 Final cash flow = $52,000 + $300,000 (1 - 0.35) = $247,000 NPV=-2924000+564620*PVIFA(13.6%,10)+$247000*PVIF(13.6%,10) =-2924000+2991695.53+69010.26 =$ 136705.79

______ will decrease as number of units increases

Average cost

High revenue low costs

Best case scenario

Common tool for analyzing the relationship between sales volume and profitability

Break even analysis

Which one of the following is a project cash inflow? Ignore any tax effects. A. decrease in accounts payable B. increase in inventory C. decrease in accounts receivable D. depreciation expense based on MACRS E. equipment acquisition

C) Decrease in accounts receivable

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? A. EBIT + D B. EBIT - T C. NI + D D. (Sales - Costs) × (1 - D) × (1- T) E. (Sales - Costs) × (1 - T)

C) NI + D

The length of time a firm must wait to recoup the money it has invested in a project is called the: A) Profitability period. B) Discounted cash period. C) Payback period. D) Valuation period. E) Internal return period.

C) payback period

The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.5 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $58,000 and projected cash inflows of $17,000 in year one, $28,000 in year two, and $30,000 in year three. The firm uses 25 percent debt and 75 percent common stock as its capital structure. The company's cost of equity is 15.5 percent while the aftertax cost of debt for the firm is 6.1 percent. What is the projected net present value of the new project

Company's Cost of Capital = .25*6.1 + .75*15.5 + 1.5 = 14.65% NPV = -58000+17000/(1+.1465)^1 + 28000/(1+.1465)^2 + 30000/(1+.1465)^3 = -1964.09 or -1964

The weighted average cost of capital for a firm can depend on all of the following except what?

Coupon rate of outstanding bonds

The internal rate of return is defined as the: A. maximum rate of return a firm expects to earn on a project. B. rate of return a project will generate if the project in financed solely with internal funds. C. discount rate that equates the net cash inflows of a project to zero. D. discount rate which causes the net present value of a project to equal zero. E. discount rate that causes the profitability index for a project to equal zero.

D

Which one of the following will decrease the net present value of a project? A. increasing the value of each of the project's discounted cash inflows B. moving each of the cash inflows forward to a sooner time period C. decreasing the required discount rate D. increasing the project's initial cost at time zero E. increasing the amount of the final cash inflow

D

Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. is rarely affected when a new product is introduced. D. can create either a cash inflow or a cash outflow at time zero of a project. E. is the only expenditure where at least a partial recovery can be made at the end of a project

D) can create either a cash inflow or a cash outflow at time zero of a project.

A project has a net present value of zero. Which one of the following best describes this project? A. The project has a zero percent rate of return. B. The project requires no initial cash investment. C. The project has no cash flows. D. The summation of all of the project's cash flows is zero. E. The project's cash inflows equal its cash outflows in current dollar terms.

D)The project's cash inflows equal its cash outflows in current dollar terms

A new product requires an initial investment of $5 million and will be depreciated to an expected salvage of zero over 5 years The price of the new product is expected to be $25,000, and the variable cost per unit is $15,000 The fixed cost is $1 million Suppose sales are 300 units -What is the DOL at this sales level? -What will happen to OCF if unit sales increases by 20%?

DOL= 1 + (FC / OCF) *OCF= (25,000-15,000)*300 - 1,000,000 = 2,000,000 DOL= 1+ (1,000,000/2,000,000) =1.5 Increase in OCF: DOL* %change in Q -Percentage change = 1.5(.20) = 30% -OCF= 2,000,000 (1+.30) = 2,600,000

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? A. Degree of sensitivity. B. Degree of operating leverage. C. Accounting break-even. D. Cash break-even. E. Contribution margin.

Degree of operating leverage

Sensitivity analysis determines the: A. Range of possible outcomes given that most variables are reliable only within a stated range. B. Degree to which the net present value reacts to changes in a single variable. C. Net present value range that can be realized from a proposed project. D. Degree to which a project relies on its fixed costs. E. Ideal ratio of variable costs to fixed costs for profit maximization.

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

If a firm just breaks even on an accounting basis, cash flow =

Depreciation

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? A. erosion effects B. taxes C. fixed expenses D. salaries E. depreciation expense

Depreciation expense

The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $238,000 and cash expenses by $184,000. The initial investment will require $96,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The company has a marginal tax rate of 32 percent. What is the annual value of the depreciation tax shield?

Depreciation tax shield = ($96,000/6) × 0.32 = $5,120

Scenario analysis is defined as the: A. Determination of the initial cash outlay required to implement a project. B. Determination of changes in NPV estimates when what-if questions are posed. C. Isolation of the effect that a single variable has on the NPV of a project. D. Separation of a project's sunk costs from its opportunity costs. E. Analysis of the effects that a project&'s terminal cash flows has on the project's NPV.

Determination of changes in NPV estimates when what-if questions are posed.

Which quantity is the largest

Financial Break Even

Total costs =

Fixed + variable costs

Which of the following variables will be forecast at their highest expected level under a worst case scenario? A. Fixed costs and salvage value. B. Variable costs and sales price C. Fixed costs and sales price. D. Fixed and variable costs. E. Initial cost and salvage value.

Fixed and variable costs

Operating leverage is the degree of dependence a firm places on its: A. Variable costs. B. Fixed costs. C. Sales. D. Operating cash flows. E. Depreciation tax shield.

Fixed costs

Which one of the following characteristics best describes a project that has a low degree of operating leverage?

High variable costs relative to the fixed costs

The operating cash flow for a project should exclude which one of the following? A. taxes B. variable costs C. fixed costs D. interest expense E. depreciation tax shield

Interest expense

If a firm just breaks even on an accounting basis, NPV will generally be

Less than 0

The change in variable costs that occurs when production is increased by one unit is referred to as the: A. Marginal cost. B. Average cost. C. Total cost. D. Scenario cost. E. Net cost.

Marginal costs

A new product requires an initial investment of $5 million and will be depreciated to an expected salvage of zero over 5 years The price of the new product is expected to be $25,000, and the variable cost per unit is $15,000 The fixed cost is $1 million Assume a required return of 18% -What is the financial break-even point

N= 5 I/Y= 18 Pv=5,000,000 FV=0 CPT PMT *1,598,892.21 = OCF Q= (FC + OCF) / (P-V) Q= (1,000,000 + 1,598,892.21) / (25,000-15,000) Q= 259.89 which has to equal a hard number so rounds up to 260 Cash BE < Accounting BE < Financial BE 100 < 200 < 260

The Lunch Counter is expanding and expects operating cash flows of $32,500 a year for seven years as a result. This expansion requires $28,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,800 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 14 percent?

NPV = - Initial Investment in fixed asset - Initial Investment in working Capital + Annual operating cash flows *(1-(1+r)^-n)/r + Working Capital realised back*(1+r)^-n NPV = - 28000 - 2800 + 32500*(1-(1+14%)^-7)/14% + 2800*(1+14%)^-7 NPV = $ 109,688.89

Which of the following is the difference between a firm's current assets and liabilities?

Net Working capital

Cash flow that results from the firm's day-to-day activities of producing and selling

Operating cash flow

the relationship between sales and operating cash flow

Operating leverage

The length of time a firm must wait to recoup the money it has invested in a project is called the:

Payback period

Wexford Industrial Supply is considering a new project with estimated depreciation of $26,000, fixed costs of $79,000, and total sales of $187,000. The variable costs per unit are estimated at $11.80. What is the accounting break-even level of production? What is the operating cash flow and degree of operating leverage at this level of sales? A. 4,871 units; $26,000; 3.14 B. 5,333 units; $79,000; 4.42 C. 5,415 units; $187,000; 1.42 D. 6,949 units; $26,000; 4.03 E. 7,248 units; $187,000; 3.03

Qaccounting break-even = ($79,000 + $26,000)/[($187,000/Q) - $11.80] = $82,000 / $11.80 = 6,949 Operating cash flow = NI + D = $0 + $26,000 Degree of operating leverage = 1 + FC/OCF = 1 + ($79,000/$26,000) = 4.03

Variable costs

Quantity * Price

Phillps Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding at 6.75 percent. The company also has 7500,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock selling for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?

Re = 0.028 + 1.34(0.112 - 0.028) = 0.14056 Rp= (0.07 x $100)/$53 = 0.13208 Debt: 80,000 x $1,000 = $80m Preferred: 750,000 x $53 = $39.75m Common: 2.5m x $42 = $105m Total: $224.75m WACC = ($105m/$224.75m)(0.14056) + ($39.75m/$224.75m)(0.13208) + ($80m/224.75m)(0.0675)(1 - 0.38) = 10.39 percent

Which one of the following statements related to WACC is correct for a firm that uses debt in its capital structure?

The WACC should decrease as the firm's debt-equity ratio increases.

Black River Tours has a capital structure of 55 percent common stock, 5 percent preferred stock, and 40percent debt. The firm has a 30 percent dividend payout ratio, a beta of 1.21, and a tax rate of 34 percent. Given this, which one of the following statements is correct?

The firm's cost of equity is unaffected by a change in the firm's tax rate.

Which one of the following increases the net present value of a project?

an increase in the aftertax salvage value of the fixed assets

Which one of the following will be used in the computation of the best-case analysis of a proposed project? A. Minimal number of units that are expected to be produced and sold. B. The lowest expected salvage value that can be obtained for a project's fixed assets. C. The most anticipated sales price per unit. D. The lowest variable cost per unit that can reasonably be expected. E. The highest level of fixed costs that is actually anticipated.

The lowest variable cost per unit that can reasonably be expected

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income.

The new machine will generate positive operating cash flows, at least in the first few years of its life.

Average cost formula

Total cost / # of units

Kelso's had a debt-equity ratio of 0.55 and a tax rate of 35 percent. The firm does not issue preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent. What is the weighted average cost of capital?

WACC = (1/1.55)(0.145) + (0.55/1.55)(0.048) = 11.06 percent

Weighted Average Cost of Capital

WeRE + WdRD(1-TC)

Financial Break-Even

Where NPV = 0 N , I/Y, PV, FV *CPT PMT

Accounting Break-Even

Where Net income = 0 Q= (FC+D) / (P-V)

Cash Break-Even

Where OCF = 0 Q= (0+FC) / (P-V)

Assigning the least favorable value to each item

Worst case scenario

Low values for items like units sold and price per unit and high values for costs

Worst case scenario

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: A. Best case sensitivity analysis. B. Worst case sensitivity analysis. C. Best case scenario analysis. D. Worst case scenario analysis. E. Base case scenario analysis

Worst case scenario analysis

Changes in the net working capital requirements: A. can affect the cash flows of a project every year of the project's life. B. only affect the initial cash flows of a project. C. only affect the cash flow at time zero and the final year of a project. D. are generally excluded from project analysis due to their irrelevance to the total project. E. reflect only the changes in the current asset accounts.

can affect the cash flows of a project every year of the project's life.

The operating cash flow of a cost cutting project: A. is equal to the depreciation tax shield. B. is equal to zero because there is no incremental sales. C. can only be analyzed by projecting the sales and costs for a firm's entire operations. D. includes any changes that occur in the current accounts. E. can be positive even though there are no sales.

can be positive even though there are no sales

The operating cash flow of a cost cutting project: A. is equal to the depreciation tax shield. B. is equal to zero because there is no incremental sales. C. can only be analyzed by projecting the sales and costs for a firm's entire operations. D. includes any changes that occur in the current accounts. E. can be positive even though there are no sales.

can be positive even though there are no sales.

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

cash inflow in the final year of the project

Which one of the following is defined as the sales level that corresponds to a zero NPV?

financial break-even

Operating leverage is the degree of dependence a firm places on its:

fixed costs

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

greater the importance of accurately predicting the value of that variable.

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

sensitivity