Test 2

Which one of the following characteristics best describes a project that has a low degree of operating leverage? A. high variable costs relative to the fixed costs B. relatively high initial cash outlay C. an OCF that is highly sensitive to the sales quantity D. high level of forecasting risk E. a high depreciation expense

A

You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could: A. lower the degree of operating leverage. B. lower the contribution margin per unit. C. increase the initial cash outlay. D. increase the fixed costs per unit while lowering the contribution margin per unit. E. lower the operating cash flow of the project.

A

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? A. hiring temporary workers from an employment agency rather than hiring part-time production employees B. subcontracting portions of the project rather than purchasing new equipment to do all the work in-house C. leasing equipment on a long-term basis rather than buying equipment D. lowering the projected selling price per unit E. changing the proposed labor-intensive production method to a more capital intensive method

B

A project has a projected IRR of negative 100 percent. Which one of the following statements must also be true concerning this project? A. The discounted payback period equals the life of the project. B. The operating cash flow is positive and equal to the depreciation. C. The net present value of the project is negative and equal to the initial investment. D. The payback period is exactly equal to the life of the project. E. The net present value of the project is equal to zero.

C

Given the following, which feature identifies the most desirable level of output for a project? A. operating cash flow equal to the depreciation expense B. payback period equal to the project's life C. discounted payback period equal to the project's life D. zero IRR E. zero operating cash flow

C

Tristate Operations started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project: A. will never pay back. B. has a zero net present value. C. is operating at a higher level than if it were operating at its cash break-even level. D. is operating at a higher level than if it were operating at its financial break-even level. E. is lowering the total net income of the firm.

C

A project with financing type cash flows is typified by a project that has which one of the following characteristics? A. conventional cash flows B. cash flows that extend beyond the acceptable payback period C. a year or more in the middle of a project where the cash flows are equal to zero D. a cash inflow at time zero E. cash inflows which are equal in amount

D

An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used. I. annual salary for the firm's president II. contribution margin per unit III. cost of equipment required by a project IV. variable cost per unit A. I and III only B. I and IV only C. II and III only D. I, III, and IV only E. I, II, and IV only

D

Which of the following are inversely related to variable costs per unit? I. contribution margin per unit II. number of units sold III. operating cash flow per unit IV. net profit per unit A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV

D

Which one of the following statements concerning scenario analysis is correct? A. The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project. B. Scenario analysis defines the entire range of results that could be realized from a proposed investment project. C. Scenario analysis determines which variable has the greatest impact on a project's final outcome. D. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions. E. Management is guaranteed a positive outcome for a project when the worst case scenario produces a positive NPV.

D

Which one of the following statements is correct in relation to independent projects? A. The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows. B. A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. C. A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return. D. The net present value profile is upsloping for projects with Financing type cash flows. E. Projects with financing type cash flows are acceptable only when the internal rate of return is negative.

D

Julia is analyzing a project that currently has a projected NPV of zero. Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently. I. increase the quantity sold II. decrease the fixed leasing cost for equipment III. decrease the labor hours needed to produce one unit IV. increase the sales price A. I and II only B. I and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

E

Which of the following statements are identified with financial break-even point? I. The present value of the cash inflows exactly offsets the initial cash outflow. II. The payback period is equal to the life of the project. III. The NPV is zero. IV. The discounted payback period equals the life of the project. A. I and II only B. I and III only C. II and IV only D. I, II, and III only E. I, III, and IV only

E

You are considering a project with conventional cash flows and the following characteristics: Internal Rate of Return- 11.63% Profitability Index- 1.04 Net Present Value- $987 Payback period- 2.98 Yrs Which of the following statements is correct given this information? I. The discount rate used in computing the net present value was less than 11.63 percent. II. The discounted payback period must be more than 2.98 years. III. The discount rate used in the computation of the profitability ratio was 11.63 percent. IV. This project should be accepted as the internal rate of return exceeds the required return. A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

E

You considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct? A. Project A should be accepted as its IRR is closer to the crossover point than is Project B's IRR. B. Project B should be accepted as it has the higher IRR. C. Both projects should be accepted as both of the project's IRRs exceed the crossover rate. D. Neither project should be accepted since both of the project's IRRs exceed the crossover rate. E. You cannot determine which project should be accepted given the information provided.

E