Fin long response

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? Accept both projects because both NPVs are positive Accept Project A because it has the shortest payback period Accept Project B and reject Project A based on the NPVs Accept Project A and reject Project B based on their AARs Accept Project A because it has the lower required return

Accept Project B and reject Project A based on the NPVs

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? Capital break-even Cash break-even Accounting break-even Financial break-even Internal break-even

Financial break-even

When analyzing a project, scenario analysis is best suited to accomplishing which one of the following? -Determining how fixed costs affect NPV -Estimating the residual value of fixed assets -Identifying the potential range of reasonable outcomes -Determining the minimal level of sales required to break even on an accounting basis -Determining the minimal level of sales required to break even on a financial basis

Identifying the potential range of reasonable outcomes

By definition, which one of the following must equal zero at the accounting break-even point? Net present value Depreciation Contribution margin Net income Operating cash flow

Net Income

Salazar's Salads is considering two projects. Project X consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project Z would instead use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? -Profitability index -Internal rate of return -Payback -Net present value -Accounting rate of return

Net present value

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following? -Initial cost of each project -Timing of the cash inflows -total cash inflows of each project -Net present value -Length of each project's life

Net present value

Humberto 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 he using? Simulation testing Sensitivity analysis Break-even analysis Rationing analysis Scenario analysis

Scenario analysis

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? Scenario Simulation Break-even Sensitivity Cash flow

Sensitivity

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the most critical aspect 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 -Scenario analysis; to guarantee each project will be profitable -Cash breakeven; to ensure the firm recoups its initial investment -Accounting breakeven; to ensure each project earns its required rate of return -Financial breakeven; to ensure each project has a positive NPV

Sensitivity analysis; to identify the key variable that affects a project's profitability

Which one of the following statements related to the internal rate of return (IRR) is correct? -The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. -A project with an IRR equal to the required return would reduce the value of a firm if accepted. -The IRR is equal to the required return when the net present value is equal to zero. -Financing type projects should be accepted if the IRR exceeds the required return. -The average accounting return is a better method of analysis than the IRR from a financial point of view.

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

You are considering two mutually exclusive projects. Project A has cash flows of −$125,000, $51,400, $52,900, and $63,300 for Years 0 to 3, respectively. Project B has cash flows of −$85,000, $23,100, $28,200, and $69,800 for Years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Should you accept or reject these mutually exclusive projects based on IRR analysis? -Accept Project A and reject Project B -Reject Project A and accept Project B -Accept both projects -Reject both projects -You should not use IRR; use a different method of analysis.

You should not use IRR; use a different method of analysis.

You are comparing two mutually exclusive projects, Project X and Project Z. The crossover point is 11.4 percent. You have determined that you should accept project X if the required return is 12.7 percent. This implies you should: -always accept Project X. -be indifferent to the projects at any discount rate above 12.7 percent. -always accept Project X if the required return exceeds the crossover rate. -accept Project Z only when the required return is equal to the crossover rate. -accept Project Z if the required return is less than 12.7 percent.

always accept Project X if the required return exceeds the crossover rate.

Anya just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $98,000. Annual sales are estimated at $64,000 and the tax rate is 21 percent. The net present value is negative $98,000. Based on this analysis, the project is expected to operate at the: maximum possible level of production. minimum possible level of production. financial break-even point. accounting break-even point. cash break-even point.

cash break-even point.

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the: -required return. -zero-sum rate. -present value rate. -break-even rate. -crossover rate.

crossover rate.

Sensitivity analysis determines the: -range of possible outcomes given that most variables are reliable only within a stated range. -degree to which the net present value reacts to changes in a single variable. -net present value range that can be realized from a proposed project. -degree to which a project relies on its initial costs. -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.

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

discount rate which causes the net present value of a project to equal zero.

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the: contribution margin per unit and set that margin equal to the fixed costs per unit. degree of operating leverage at the current sales level. accounting break-even point. cash break-even point. financial break-even point.

financial break-even point.

As the degree of sensitivity of a project to a single variable rises, the: less important the variable is to the final outcome of the project. less volatile the project's net present value is to that variable. greater is the importance of accurately predicting the value of that variable. greater is the sensitivity of the project to the other variable inputs. less volatile is the project's outcome.

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

The key means of defending against forecasting risk is to: -rely primarily on the net present value method of analysis. -increase the discount rate assigned to a project. -shorten the life of a project. -identify sources of value within a project. -ignore any potential salvage value that might be realized.

identify sources of value within a project.

Forecasting risk is defined as the possibility that: -some proposed projects will be rejected. -some proposed projects will be temporarily delayed. -incorrect decisions will be made due to erroneous cash flow projections. -some projects will be mutually exclusive. -tax rates could change over the life of a project.

incorrect decisions will be made due to erroneous cash flow projections.

The Baker Supply would like to offer special sale prices to the firm's best customers under the following terms: 1The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. 2The units purchased must be paid for in cash at the time of sale. 3The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4The net profit of the firm should not be affected. 5The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the: average variable cost of materials only. average cost of all variable inputs. sensitivity value of the variable costs. marginal cost of materials only. marginal cost of all variable inputs.

marginal cost of all variable inputs.

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. forecasting scenario sensitivity simulation break-even

sensitivity

Javangula Foods is considering two mutually exclusive projects and has determined that the crossover rate for these projects is 12.3 percent. Given this information, you know that: -neither project will be accepted if the discount rate is less than 12.3 percent. -both projects have a negative NPV at discount rates greater than 12.3 percent. -both projects provide an internal rate of return of 12.3 percent. -both projects have a zero NPV at a discount rate of 12.3 percent. -the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent.

the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent.

Simulation analysis is based on assigning a _____ and analyzing the results. narrow range of values to a single variable narrow range of values to multiple variables simultaneously wide range of values to a single variable wide range of values to multiple variables simultaneously single value to each of the variables

wide range of values to multiple variables simultaneously

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: best-case sensitivity analysis. worst-case sensitivity analysis. best-case scenario analysis. worst-case scenario analysis. base-case scenario analysis.

worst-case scenario analysis.