CH 11 Homework

A project with a life of 7 years is expected to provide annual sales of $270,000 and costs of $181,000. The project will require an investment in equipment of $505,000, which will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/−10 percent. The tax rate is 21 percent. What is the annual operating cash flow for the best-case scenario?

$121,089

A 5-year project is expected to provide annual sales of $173,000 with costs of $91,500. The equipment necessary for the project will cost $300,000 and will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/−15 percent. The tax rate is 21 percent. What is the annual operating cash flow for the worst-case scenario?

$45,642

A 9-year project is expected to generate annual sales of 9,900 units at a price of $86 per unit and a variable cost of $57 per unit. The equipment necessary for the project will cost $397,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $240,000 per year and the tax rate is 21 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price?

$7,821

Based upon the following graph, which variable should Simmons Corporation be most concerned about?

Price

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

Sensitivity

When reviewing a graph of data from sensitivity analysis, the ____________ the line, the ____________ the sensitivity of the estimated Net Present Value.

Steeper, greater.

Which one of the following will be used in the best-case analysis of a proposed project?

The lowest variable cost per unit that can reasonably be expected

If a substantial percentage of the scenarios look bad, the degree of forecasting risk is high and further investigation is in order.

True

Fixed costs:

are constant over the short-run regardless of the quantity of output produced.

Sensitivity analysis determines the:

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

The main focus of sensitivity analysis is to:

determine the one variable that has the highest level of risk.

It is recommended that at a minimum, we might want to investigate _________ scenarios in all, including the base case.

five

To get the worst case scenario, we assign the least favorable value to each item. This means to assign low values for items like units sold and price per unit and:

high values for costs.

Forecasting risk is defined as the possibility that:

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

The base-case values used in scenario analysis are the values considered to be the most:

likely to occur.

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

sensitivity

Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis.

simulation

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.

Sun Brite has a new pair of sunglasses it is evaluating. The company expects to sell 6,500 pairs of sunglasses at a price of $160 each and a variable cost of $112 each. The equipment necessary for the project will cost $340,000 and will be depreciated on a straight-line basis over the 9-year life of the project. Fixed costs are $260,000 per year and the tax rate is 21 percent. How sensitive is the operating cash flow to a $1 increase in variable costs per pairs of sunglasses?

−$3,861