SB 11 Evaluating NPV Estimates

low

From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage _____.

riskiness, time value, all, mutually exclusive

NPV is superior capital budgeting because 1. it considers the _ of the project. 2. it considers _ _ of money. 3. it considers _ the cash flows. 4. it properly chooses among _ _ projects (helps rank).

increase

Practically it is easier to _ operating leverage then to do the opposite

time value, tax shield

Present value is superior to accounting profit because it adjusts for _ _ and considers the depreciation _ _ effect.

True

True or false: When a business does hard rationing, the firm's DCF analysis breaks down.

reliability

West Corporation estimated cash flows for a project, evaluated those cash flows using NPV, and determined that the project was acceptable. Unfortunately West Corporation lost money on the project. This may have been avoided had they assessed the _ of the cash flow estimates.

Cash Flow

What is more important to project analysis Cash Flow or Accounting Income

best case

The NPV of the scenario originally is usually used as the _ _

soft

The Omega Division of Alpha Corporation has been allocated $4 million for capital spending but has identified $4.6 million in positive NPV projects. Omega's manager thinks he can convince the company to fund the additional $0.6 million dollars because Omega uses _ rationing to control overall spending.

financial

The _ break-even is the sales level that results in a zero NPV.

DOL

The _ is the percentage change in operating cash flow relative to the percentage change in quantity sold.

operating

The degree to which a firm or project relies on fixed costs is called the _ leverage.

forecasting risk

The possibility that errors in projected cash flows will lead to incorrect decisions is called _ _ , or estimation, risk.

estimation, forecasting

The possibility that errors in projected cash flows will lead to incorrect decisions is known as _ risk _ risk

hard rationing

The situation that occurs when a business cannot raise financing for a project under any circumstances is called _ _

soft

The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting is called _ rationing.

constant

The variable cost per unit may remain _ as the number of units produced increases.

scenario

_ analysis involves estimating the best-case, worst-case, and base-case cash flows and calculating the corresponding NPVs.

simulation

_ analysis uses a combination of scenario and sensitivity analysis.

depreciation, fixed costs

_ and _ _ are included in the numerator of the accounting profit break even point equation

exceeds

Firm gets profit when the total number of units sold _ the accounting break-even point

uncommon

In a competitive market, positive NPV projects are: _

beyond

A firm will start generating positive accounting profits _ the break even sales point.

close

To be considered good, projected cash flows should be _ to actual cash flows.

depreciation allowance

When a project breaks even on an accounting basis, the cash flow for that period will equal _ _ for period

high

A firm with higher operating leverage will have e (low/high) fixed costs relative to a firm with low operating leverage.

zero

Break even equals NPV of _

financing

Capital rationing exists when a company has identified positive NPV projects but can't find _____.

sensitivity analysis

When using _ _ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable.