Ch 11 Conceptual Questions

Which of the following characteristics relate to the cash break-even point for a given project? I. The project never pays back. II. The IRR equals the required rate of return. III. The NPV is negative and equal to the initial cash outlay. IV. The operating cash flow is equal to the depreciation expense. A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

A. I and III only

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. high variable costs relative to the fixed costs

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. lower the degree of operating leverage.

The change in variable costs that occurs when production is increased by one unit is referred to as the: A. marginal cost. B. average cost. C. total cost. D. scenario cost. E. net cost.

A. marginal cost.

The change in revenue that occurs when one more unit of output is sold is referred to as: A. marginal revenue. B. average revenue. C. total revenue. D. erosion. E. scenario revenue.

A. marginal revenue.

Sensitivity analysis is based on: A. varying a single variable and measuring the resulting change in the NPV of a project. B. applying differing discount rates to a project's cash flows and measuring the effect on the NPV. C. expanding and contracting the number of years for a project to determine the optimal project length. D. the best, worst, and most expected situations. E. various states of the economy and the probability of each state occurring.

A. varying a single variable and measuring the resulting change in the NPV of a project.

Ted is analyzing a project using simulation. His focus is limited to the short-term. To ease the simulation process, he is combining expenses into various categories. Which one of the following should he include in the fixed cost category? A. production department payroll taxes B. equipment insurance C. sales tax D. raw materials E. product shipping costs

B. equipment insurance

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. subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

Fixed costs: A. change as a small quantity of output produced changes. B. are constant over the short-run regardless of the quantity of output produced. C. are defined as the change in total costs when one more unit of output is produced. D. are subtracted from sales to compute the contribution margin. E. can be ignored in scenario analysis since they are constant over the life of a project.

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

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? A. degree of sensitivity B. degree of operating leverage C. accounting break-even D. cash break-even E. contribution margin

B. degree of operating leverage

Sensitivity analysis determines the: A. range of possible outcomes given that most variables are reliable only within a stated range. B. degree to which the net present value reacts to changes in a single variable. C. net present value range that can be realized from a proposed project. D. degree to which a project relies on its fixed costs. E. ideal ratio of variable costs to fixed costs for profit maximization.

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

Scenario analysis is defined as the: A. determination of the initial cash outlay required to implement a project. B. determination of changes in NPV estimates when what-if questions are posed. C. isolation of the effect that a single variable has on the NPV of a project. D. separation of a project's sunk costs from its opportunity costs. E. analysis of the effects that a project's terminal cash flows has on the project's NPV.

B. determination of changes in NPV estimates when what-if questions are posed.

Operating leverage is the degree of dependence a firm places on its: A. variable costs. B. fixed costs. C. sales. D. operating cash flows. E. net working capital.

B. fixed costs

Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I. operating cash flow II. internal rate of return III. net income IV. payback period A. I only B. III only C. II and III only D. I and IV only E. I, II, and III only

C. II and III only

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. The net present value of the project is negative and equal to the initial investment.

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. discounted payback period equal to the project's life

Webster Iron Works 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. is operating at a higher level than if it were operating at its cash break-even level.

The contribution margin per unit is equal to the: A. sales price per unit minus the total costs per unit. B. variable cost per unit minus the fixed cost per unit. C. sales price per unit minus the variable cost per unit. D. pre-tax profit per unit. E. aftertax profit per unit.

C. sales price per unit minus the variable cost per unit.

At the accounting break-even point, the: A. payback period must equal the required payback period. B. NPV is zero. C. IRR is zero. D. contribution margin per unit equals the fixed costs per unit. E. contribution margin per unit is zero.

C. IRR is zero

As the degree of sensitivity of a project to a single variable rises, the: A. less important the variable to the final outcome of the project. B. less volatile the project's net present value to that variable. C. greater the importance of accurately predicting the value of that variable. D. greater the sensitivity of the project to the other variable inputs. E. less volatile the project's outcome.

C. greater the importance of accurately predicting the value of that variable.

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? A. determining how fixed costs affect NPV B. estimating the residual value of fixed assets C. identifying the potential range of reasonable outcomes D. determining the minimal level of sales required to break-even on an accounting basis E. determining the minimal level of sales required to break-even on a financial basis

C. identifying the potential range of reasonable outcomes

Forecasting risk is defined as the possibility that: A. some proposed projects will be rejected. B. some proposed projects will be temporarily delayed. C. incorrect decisions will be made due to erroneous cash flow projections. D. some projects will be mutually exclusive. E. tax rates could change over the life of a project.

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

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. A. forecasting B. scenario C. sensitivity D. simulation E. break-even

C. sensitivity

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: A. marginal spending. B. capital preservation. C. soft rationing. D. hard rationing. E. marginal rationing.

C. soft rationing

Variable costs can be defined as the costs that: A. remain constant for all time periods. B. remain constant over the short run. C. vary directly with sales. D. are classified as non-cash expenses. E. are inversely related to the number of units sold.

C. vary directly with sales.

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. I, III, and IV only

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. I, III, and IV only

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? A. capital break-even B. cash break-even C. accounting break-even D. financial break-even E. internal break-even

D. financial break-even

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? A. leverage B. risk C. break-even D. sensitivity E. cash flow

D. sensitivity

A project has a payback period that exactly equals the project's life. The project is operating at: A. its maximum capacity. B. the financial break-even point. C. the cash break-even point. D. the accounting break-even point. E. a zero level of output.

D. the accounting break-even point.

Simulation analysis is based on assigning a _____ and analyzing the results. A. narrow range of values to a single variable B. narrow range of values to multiple variables simultaneously C. wide range of values to a single variable D. wide range of values to multiple variables simultaneously E. single value to each of the variables

D. wide range of values to multiple variables simultaneously

Which of the following variables will be at their highest expected level under a worst case scenario? I. fixed cost II. sales price III. variable cost IV. sales quantity A. I only B. III only C. II and III only D. I and III only E. I, III, and IV only

D. I and III only

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. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. method of analysis used to make the decision. B. initial cash outflow. C. ability to recoup any investment in net working capital. D. accuracy of the projected cash flows. E. length of the project.

D. accuracy of the projected cash flows

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. A. forecasting B. combined C. complex D. simulation E. break-even

D. simulation

Which one of the following will be used in the computation of the best-case analysis of a proposed project? A. minimal number of units that are expected to be produced and sold B. the lowest expected salvage value that can be obtained for a project's fixed assets C. the most anticipated sales price per unit D. the lowest variable cost per unit that can reasonably be expected E. the highest level of fixed costs that is actually anticipated

D. the lowest variable cost per unit that can reasonably be expected

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: A. best case sensitivity analysis. B. worst case sensitivity analysis. C. best case scenario analysis. D. worst case scenario analysis. E. base case scenario analysis.

D. worst case scenario analysis

Theresa 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. I, II, III, and IV

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. I, III, and IV only

Which one of the following statements concerning variable costs is correct? A. Variable costs minus fixed costs equal marginal costs. B. Variable costs are equal to fixed costs when production is equal to zero. C. An increase in variable costs increases the operating cash flow. D. Variable costs are inversely related to fixed costs. E. Variable costs per unit are inversely related to the contribution margin per unit.

E. Variable costs per unit are inversely related to the contribution margin per unit.

Valerie just completed analyzing a project. Her analysis indicates that the project will have a 6-year life and require an initial cash outlay of $320,000. Annual sales are estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative $320,000. Based on this analysis, the project is expected to operate at the: A. maximum possible level of production. B. minimum possible level of production. C. financial break-even point. D. accounting break-even point. E. cash break-even point.

E. cash break-even point.

When the operating cash flow of a project is equal to zero, the project is operating at the: A. maximum possible level of production. B. minimum possible level of production. C. financial break-even point. D. accounting break-even point. E. cash break-even point.

E. cash break-even point.

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the: A. contribution margin per unit and set that margin equal to the fixed costs per unit. B. contribution margin per unit. C. accounting break-even point. D. cash break-even point. E. financial break-even point.

E. financial break-even point.

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? A. average variable cost B. average total cost C. average total revenue D. marginal revenue E. marginal cost

E. marginal cost

The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms: 1. The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. 2. The units purchased must be paid for in cash at the time of sale. 3. The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4. The net profit of the firm should not be affected. 5. The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the: A. average variable cost of materials only. B. average cost of all variable inputs. C. sensitivity value of the variable costs. D. marginal cost of materials only. E. marginal cost of all variable inputs.

E. marginal cost of all variable inputs.

Which one of the following types of analysis is the most complex to conduct? A. scenario B. break-even C. sensitivity D. degree of operating leverage E. simulation

E. simulation

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function? A. The steepness of the function relates to the project's degree of operating leverage. B. The steeper the function, the less sensitive the project is to changes in the sales quantity. C. The resulting function will be a hyperbole. D. The resulting function will include only positive values. E. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

E. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as: A. financial rejection. B. project rejection. C. soft rationing. D. marginal rationing. E. capital rationing.

E. capital rationing

Which one of the following is defined as the sales level that corresponds to a zero NPV? A. accounting break-even B. leveraged break-even C. marginal break-even D. cash break-even E. financial break-even

E. financial break-even

The base case values used in scenario analysis are the ones considered the most: A. optimistic. B. desired by management. C. pessimistic. D. conducive to creating a positive net present value. E. likely to occur.

E. likely to occur

By definition, which one of the following must equal zero at the cash break-even point? A. net present value B. internal rate of return C. contribution margin D. net income E. operating cash flow

E. operating cash flow

Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is Steve using? A. simulation testing B. sensitivity analysis C. break-even analysis D. rationing analysis E. scenario analysis

E. scenario analysis

By definition, which one of the following must equal zero at the accounting break-even point? A. net present value B. internal rate of return C. contribution margin D. net income E. operating cash flow

d. net income

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: A. financial deferral. B. financial allocation. C. capital allocation. D. marginal rationing. E. hard rationing.

e. hard rationing