Ch 7-FIN4443
Compute net accounting profit based on the following information: revenues = $4,000; variable costs = $1,600; fixed costs = $700; depreciation = $300; and tax rate = 20%. Multiple choice question. $1,120 $1,360 $1,372 $1,400
$1,120 ($4,000 − 1,600 − 700 − 300)(1 − 0.2) = $1,120.
The marketing department has projected that the firm's market share will be 8 percent of industry sales. Industry sales should total 75,000 units. If the price per unit is $200, the firm's expected sales revenue will be Blank______. $3,825,000 $4,500,000 $525,000 $1,200,000
$1,200,000 75,000*200=15,000,000*.08= 1,200,000
You are in the business of manufacturing watches. The parts for each of these watches cost an average of $25. Your period costs for the month are $3,000. What will be the monthly total variable costs if you manufacture 100 watches? Multiple choice question. $2,500 $5,500 $25 −$500
$2,500 Total variable costs = $25 × 100 = $2,500.
What is the contribution margin if the sales price per unit is $15,000, variable cost per unit is $10,000, and fixed costs are $2,000? Ignore taxes. Multiple choice question. $5,000 $25,000 $3,000 $13,000
$5,000 CM = Sales price - Variable cost = $15,000 − 10,000 = $5000.
What is next year's expected cash flow if there is a 50/50 probability that it will be either $250 million or $750 million? Multiple choice question. $250 million $100 million $700 million $500 million
$500 million 0.5 × $250 million + 0.5 × $750 million = $500 million.
In the context of capital budgeting, what does sensitivity analysis do? Multiple choice question. It examines the sensitivity of profits to changes in market share. It examines the sensitivity of management to the possibility that a project will be rejected. It examines the increase in the cost of a project when the cost of capital increases. It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.
It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.
What is the purpose of accounting profit break-even analysis? To determine the level of sales at which profits are equal to zero. To determine the level of sales at which profits generate the minimum rate of return expected by shareholders. To determine the level of sales at which variable costs are fully recovered. To determine the maximum number of units that can be produced in a plant.
To determine the level of sales at which profits are equal to zero.
Which of the following statements are true regarding fixed and variable costs? Multiple select question. Total fixed costs remain constant, while total variable costs increase if the level of output increases. Both the fixed costs per unit and the variable costs per unit will decrease as the level of output increases. Fixed costs per unit will decrease, while variable costs per unit will stay constant if the level of output increases. Fixed costs per unit and variable costs per unit will increase if the level of output increases.
Total fixed costs remain constant, while total variable costs increase if the level of output increases. Fixed costs per unit will decrease, while variable costs per unit will stay constant if the level of output increases.
The value of real options, if they exist, must be included True False
True
True or false: While performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time. True False
True
What is the basic output of a Monte Carlo simulation? Multiple choice question. a distribution of cash flow for each future year a net present value a single cash flow for each future year a probability for each future year
a distribution of cash flow for each future year
A key reason that makes NPV a superior capital budgeting technique is that it uses ______ instead of ______. Multiple choice question. revenues; costs profits; cash flows cash flows; profits
cash flows; profits
In a Monte Carlo simulation, specifying a distribution for annual revenue will generally involve which of the following? Multiple select question. determining a distribution of sale prices modeling industry sales determining the most desired outcome forecasting probabilities of various market shares
determining a distribution of sale prices modeling industry sales forecasting probabilities of various market shares
A decision tree involves ______. Multiple choice question. depicting the decision-making process in a firm using an organizational chart mapping the sequential outcomes of various decisions and corresponding probabilities mapping a strategy for dealing with the competition determining the number of decisions that need to be made before a product can be approved
mapping the sequential outcomes of various decisions and corresponding probabilities
Which of the following are costs related to a doctor's office are NOT fixed costs? rent for the medical office medical supplies lab reports for patients property taxes
medical supplies lab reports for patients
A distribution of cash flow for each future year is Blank______ of a Monte Carlo simulation and a probability for each future year is Blank______ outputs; outputs inputs; inputs inputs; outputs outputs; inputs
outputs; inputs
Contribution margin refers to the contribution made by each additional unit sold to ______. Multiple choice question. dividends taxes pretax profits pretax sales
pretax profits
Break-even analysis determines how low __________ can fall before a project loses money.
sales
Market ____times market ____ times price per unit can determine total revenue for a firm using Monte Carlo simulation.
share, size
Which of the following are variable costs for a grocery store? Multiple select question. the cost of labor to stock shelves the cost of vegetables the store manager's salary rent for the store
the cost of labor to stock shelves the cost of vegetables
The contribution margin per unit will increase if Blank______. Multiple choice question. fixed costs decrease the sales price per unit decreases while the variable cost per unit increases both the sales price per unit and the variable cost per unit increase the sales price per unit increases while the variable cost per unit decreases
the sales price per unit increases while the variable cost per unit decreases
Which of the following pieces of information are required in order to compute NPV? Multiple select question. the time horizon of the project the discount rate projected future cash flows projected future debt costs
the time horizon of the project the discount rate projected future cash flows
Mining operations almost always provide ___. Multiple choice question. negative NPV projects positive NPV projects timing options
timing options
The marketing department has projected that the firm's market share will be 15 percent of industry sales. Industry sales should total 30,000 units. If the price per unit is $150, the firm's expected sales revenue will be Blank______. Multiple choice question. $4,500,000 $525,000 $3,825,000 $675,000
$675,000 0.15 × 30,000 × $150 = $675,000.
Compute the depreciation tax shield based on the following information: depreciation expense = $40,000; net profit before depreciation expense = $60,000; and tax rate = 20%. $5,000 $12,000 $4,000 $8,000
$8,000 40,000*.20= 8,000
A firm has a 50% probability of obtaining regulatory approval to enter an overseas market. If it enters that market, there is a 20% probability of successfully gaining significant market share. What is the probability of successfully entering the overseas market? 10% 20% 8% 1%
10% 0.5 × 0.2 = 10%.
A firm has a 10% probability of obtaining regulatory approval to enter an overseas market. If it enters that market, there is a 30% probability of successfully gaining significant market share. What is the probability of successfully entering the overseas market? 3% 10% 5% 8%
3% .10*.30=.03
Compute the NPV break-even point based on the following information: EAC = $20,000; fixed cost = $35,000; tax rate = 20 percent; depreciation = $500; and contribution margin = $1,000. Multiple choice question. 44 units 69 units 48 units 60 units
60 units Use Fin B-E formula EAC+(Fixed costs)(1-Tc)-(depr)(Tc) / (sales price-variable costs)(1-Tc) Note: sales price-variable costs is contribution margin ($20,000 + ($35,000) × (1 − 0.2)] − ($500 × 0.2))/(($1,000) × (1 − 0.2)) = 59.875
Which of the following formulas can be used to determine total revenue for a firm using Monte Carlo simulation? Multiple choice question. Market share × Price per unit Market size × Market share × Price per unit Market size × Price per unit Market size × Market share
Market size × Market share × Price per unit
Which of the following is the most complex technique for capital budgeting analysis? Monte Carlo simulation sensitivity analysis scenario analysis break-even analysis
Monte Carlo simulation
Monte Carlo simulation attempts to model Blank______. Multiple choice question. a casino certainty uncertainty
uncertainty
An accounting break-even point of 1,000 means that Blank______. Multiple choice question. the maximum capacity of the plant is 1,000 units the total fixed costs are equal to $1,000 when the firm sells 1,000 units, profits will be equal to zero when the firm generates costs of $1,000, profits will be equal to zero
when the firm sells 1,000 units, profits will be equal to zero
Which of the following defines the contribution margin? Ignore taxes. Multiple choice question. Contribution Margin = Sales + Capital gains Contribution Margin = Sales − Fixed costs Contribution Margin = Sales − Variable costs Contribution Margin = Sales + Interest income
Contribution Margin = Sales − Variable costs
Modeling industry sales, forecasting probabilities of various market shares, and determining a distribution of sale prices are all used to specify a ________________ for annual revenue in a Monte Carlo simulation.
Distribution
Which of the following are reasons why NPV is considered a superior capital budgeting technique? Multiple select question. NPV considers the time value of money. NPV results in only one rate of return. NPV properly discounts earnings. NPV considers all the cash flows.
NPV considers the time value of money. NPV considers all the cash flows.
Which of the following statements is true in the context of comparing accounting profit and present value break-even point? Multiple choice question. Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect. Both techniques are equally good. The superiority of a particular technique will vary from firm to firm depending on the unique circumstances of the firm. Accounting profit is superior because the financial statements report profits and not present value.
Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.
A firm will start generating positive accounting profits Blank______. Multiple choice question. below the break-even sales point at the break-even sales point at the point at which revenues exceed total fixed costs beyond the break-even sales point
beyond the break-even sales point
Sensitivity analysis is also known as Blank______. Multiple select question. break-even analysis bop (best, optimistic and pessimistic) analysis profit and loss analysis what-if analysis simulation analysis
bop (best, optimistic and pessimistic) analysis what-if analysis
Compute the NPV of a project that has the following end-of-year cash flow projections: Year 1 = $40,000; Year 2 = $50,000; and Year 3 = −$22,000. The project requires an initial investment of $75,000 and has a discount rate of 10 percent. Multiple choice question. −$13,843 $19,215 −$7,409 $21,156
−$13,843 CF0=-75,000 CF1=40,000 CF2=50,000 CF3=-22,000 I=10
In general, what is the decision rule for NPV? Multiple choice question. Accept a project if the NPV is less than zero. Accept a project if the NPV is less than the IRR. Accept a project if the NPV is greater than the IRR. Accept a project if the NPV is greater than zero.
Accept a project if the NPV is greater than zero.
Which of the following is an example of a timing option? Multiple choice question. Building a gas station and waiting to see if that gas station is successful before building additional stations. Waiting to build a convenience store in an area where several housing developments have been proposed. Disposing of a piece of property in an area where development prospects have failed to materialize.
Waiting to build a convenience store in an area where several housing developments have been proposed.
Under which of the following scenarios will an option to abandon be a valuable option? Multiple select question. When a project's assets can be quickly liquidated at fair values? When a project is guaranteed to be a success? When there is the possibility of a negative future outcome? When future market conditions are unpredictable?
When a project's assets can be quickly liquidated at fair values? When there is the possibility of a negative future outcome? When future market conditions are unpredictable?