Finance 342 Chapter 10 Concept Questions

XYZ Corporation is planning a $4 million investment with net cash flows expected to be 0.12 x sales unit - $1 million per year for 6 years. The discount rate is 10%. What is the break even sales units to break even in terms of NPV? (Hint: the 6 year annuity factor at a 10% discount rate is 4.355).

$15.987 million Rationale: 4.355 x (.12 x sales - $1 million) = $4 million .5226 x sales - $4.355 million = $4 million Sales = ($4 million + $4.355 million)/.5226 = $15.987 million

Which of the following indicates the correct equation for calculating the degree of operating leverage?

DOL = 1 + (fixed costs/profits) / DOL = %change in profits/%change in sales

The make-or-break variable most commonly used in break-even analysis is ________; however, _______ can also be used to help a firm understand the break-even point.

Sales Volume / Costs

Project analysis given different combinations of variables is called:

Scenario Analysis

Managers ask "what if" questions related to the factors that can increase or reduce project cash flows because ________.

changes in cash flows change NPV and may change the acceptability of a project

Which of the following is the best definition of the firm's capital budget?

it is the list of the firm's planned investment projects for the coming year

Real options include the option to (choose 4):

postpone abandon expand modify