Finance 325 EXAM 3

Which one of the following should not be included in the analysis of a new product?

Money already spent for research and development of the new product

Sensitivity analysis determines the:

degree to which the net present value reacts to changes in a single value

The internal rate of return is defined as the:

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

Which one of these statements related to discounted payback is correct?

discounted payback is biased towards short-term projects

Which one of the following is an example of a sunk cost?

$1,200 paid to repair a machine last year

Forecasting risk is defined as the possibility that:

incorrect decisions will be made due to erroneous cash flow projections

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows

Which one of the following costs was incurred in the past and cannot be recouped?

sunk

Simulation analysis is based on assigning a ________ and analyzing the results.

wide range of values to multiple variables simultaneously

The degree of operating leverage is equal to:

1+ FC/OCF

A project has a unit price of $29.99, a variable cost per unit of $9.06, fixed costs of $487,020, and depreciation expense of $38,009. Ignore taxes. What is the accounting break-even quantity?

25,085 units

You are in charge of a project that has a degree of operating leverage of 1.06. What will happen to the operating cash flows if the number of units you sell increase by 3.7 percent?

3.92 percent increase

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement

Financial break-even

Assume both the discount and tax rates are positive values. At the financial break-even point, the:

IRR equals the required return

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:

hard rationing

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:

hard rationing

The change in revenue that occurs when one more unit of output is sold is referred to as:

marginal revenue

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

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Hiring additional employees to handle the increased workload should the firm accept the wreath project

By definition, which one of the following must equal zero at the cash break-even point?

Operating cash flow

Which one of the following indicates an accept decision for an independent project with conventional cash flows?

PI greater than 1.0

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 be reasonably be expected. Which time of analysis is he using

Scenario analysis

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key 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

By definition, which one of the following must equal zero at the accounting break-even point?

net income

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

sensitivity

Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million, respectively. For the firm as a whole, the management of Uptown Promotions has limited spending to $10 million for new projects next year. This is an example of:

soft rationing

Applying the discounted payback decision rule to all projects may cause:

some positive net present value project to be rejected

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

stand-alone principle

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

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

worst-case scenario analysis