CH 11 HW
What will the shapes of total revenue and total costs be on a graph that depicts number of units on the x-axis and dollar amount (revenues and cost) on the y-axis?
Both the total revenue and total cost curves will slope upward.
The ______ break-even is the sales level that results in a zero NPV.
financial
For all practical purposes, it is easier to _____.
increase operating leverage than to decrease it
As a particular matter, it is easier to ______ operating leverage than it is to ______ it.
increase, decrease
Which of the following is a fixed cost for a tire manufacturing business?
Manager's salary of $98,000/year Building rent of $10,000/month
The situation that occurs when a business cannot raise financing for a project under any circumstances is called _____ rationing.
hard
In a competitive market, positive NPV projects are:
uncommon
Which of the following represents the accounting profit break-even point?
(Fixed costs + Depreciation)/Contribution margin
Broadband, Inc. has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $1,000,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of $_____ as the base case.
1,000,000
Rank each of the following in order from most important to least important as they pertain to project analysis:
1. cash flow 2. accounting income
What is a sunk cost?
A cost incurred in the past that is irrelevant to the capital investment decision process.
Which of the following defines the contribution margin per unit? Ignore taxes.
Contribution Margin per Unit = Sales price - Variable cost per unit
The _____ is the percentage change in operating cash flow relative to the percentage change in quantity sold.
DOL
Which of the following is the correct equation for the degree of operating leverage?
DOL = 1 + FC/OCF
In the context of capital budgeting, what does sensitivity analysis do?
It examines how sensitive a particular NPV calculation is to changes in underlying assumptions.
Which of the following costs relating to a doctor's office are variable costs?
Medical supplies Lab reports for patients
Which of the following equations correctly relates OCF to sales volume?
OCF = (P − v) × Q − FC
Suppose Price per Unit is $6, variable cost per unit is $2, fixed costs are $400 and the depreciation allowance per year is $500. The relationship between operating cash flow (OCF) and sales volume (Q) can be expressed as:
OCF = −400 + 4*Q
_______ value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.
Present
Which of the following statements is true in the context of comparing accounting profit and present value break-even point?
Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.
Which of the following is a fixed cost for a garment manufacturing business?
Rent for the building
Which of the following is an example of a sunk cost?
Research and development expense incurred in the past
_______ analysis involves estimating the best-case, worst-case, and base-case cash flows and calculating the corresponding NPVs.
Scenario
________ analysis is the investigation of what happens to NPV when only one variable is changed.
Sensitivity
______ analysis uses a combination of scenario and sensitivity analysis.
Simulation
Which of the following are examples of variable costs for a grocery store?
The cost of labor to stock shelves. The cost of vegetables.
Which of the following are examples of variable costs for a car manufacture?
The cost of steel Labor costs Freight costs
Which of the following are true about variable costs?
The variable cost per unit may remain constant as the number of units produced increases. Total variable costs increase as the total number of units produced increases.
What is the purpose of accounting profit break-even analysis?
To determine the level of sales at which profits are equal to zero.
What is the relationship between variable costs and output?
Total variable costs are directly related to the level of output.
True or false: Ultimately, we are more interested in cash flow than accounting income.
True
True or false: When a business does hard rationing, the firm's DCF analysis breaks down.
True
When McDonald's decides to build a new restaurant at a particular location, which of the following competitors might also be tempted to locate new facilities in the same area?
Wendy's Burger King
Financial break-even is the sales level that results in _____.
an NPV of zero
From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage _____.
as low as possible
When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in _____.
asking what-if questions scenario analysis
To be considered good, projected cash flows should _____ actual cash flows.
be close to
A firm will start generating positive accounting profits _____.
beyond the break-even sales point
The sales level that results in a zero operating cash flow is called the _____
break-even
A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project _____.
cannot be observed
The sales level that results in a zero operating cash flow is called the _____ break-even.
cash
Evans Corporation estimated that the cash flows last year from a particular project would be $40,000, but the actual cash flow turned out to be $37,500. Evans Corporation should ______.
not expect cash flow estimates to be exactly right every time
The degree to which a firm or project relies on fixed costs is called the _____ leverage.
operating
The degree to which a firm or project relies on fixed costs is called the ______ leverage.
operating
A situation in which a firm has positive NPV projects but cannot find the necessary financing is called capital _______.
rationing
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.
reliability
A fixed cost is a cost that _____.
remains constant as the level of business activity changes
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.
soft
The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting is called ______ rationing.
soft
Capital rationing exists when a company has identified positive NPV projects but can't find _____.
the necessary financing
The contribution margin per unit will increase if _____.
the sales price per unit increases while the variable cost per unit decreases
A firm will start generating profits when ___.
the total number of units sold exceeds the accounting break-even point
The ______ cost is equal to the quantity of output times the cost per unit of output.
variable
The basic approach to evaluating cash flow and NPV estimates involves asking _______ -if questions
what
The basic approach to evaluating cash flow and NPV estimates involves asking ______.
what-if questions
An accounting break-even point of 1,000 units means that ____.
when the firm sells 1,000 units, profits will be equal to zero
An accounting break-even point of 2,000 means the firm _____.
will start generating profits if it sells more than 2,000 units
A firm with higher operating leverage will have ______ fixed costs relative to a firm with low operating leverage.
high
A firm with higher operating leverage will have _____ (low/high) fixed costs relative to a firm with low operating leverage.
high
Which of the following are examples of fixed costs for a car repair shop performing oil changes and other repairs?
Salary for the shop manager Insurance for the shop Monthly rent for the shop
In a graph with output on the x-axis and dollar amount (for costs and revenues) on the y-axis, what will be the shapes of variable and fixed costs?
Variable costs will be upward sloping while fixed costs will be parallel to the x-axis
A contribution margin of $35 means that _____.
each sale of an additional unit will contribute $35 toward paying fixed costs
Contribution margin refers to the contribution made toward paying _____ by each additional unit sold.
fixed costs
The possibility that errors in projected cash flows will lead to incorrect decisions is called ______, or estimation risk.
forecasting
In a simulation, the average NPV and the spread of NPVs around the average are determined by _____.
repeated random drawings
Corporate managers care about the break-even point because it indicates the level to which _____ can fall before a project will start losing money.
sales
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.
sensitivity analysis
The possibility that errors in projected cash flows will lead to incorrect decisions is known as _____.
forecasting risk estimation risk
