Ch. 7

23. Sensitivity analysis determines the: a. range of possible outcomes given that most variables can assume a range of values. b. degree to which the net present value reacts to changes in a single variable. c. extent of the range of net present values that can be realized from a proposed project. d. degree to which a project is reliant upon the fixed costs. e. ideal ratio of variable costs to fixed costs for profit maximization.

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

40. At the accounting break-even level of sales, the operating cash flow is equal to: a. zero. b. depreciation. c. fixed costs plus depreciation. d. net income plus taxes. e. the variable costs.

Depreciation

42. 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 equals the fixed costs. e. contribution margin is zero.

IRR is zero

19. 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.

Likely to occur

51. 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. c. increase the initial cash outlay. d. increase the fixed costs per unit while lowering the contribution margin. e. lower the operating cash flow of the project.

Lower the degree of operating leverage

35. Management wants to offer a "Thank You" sale to its customers by offering to sell additional units of a product at the lowest price possible without affecting the firm's profits. The price management charges for these one-time sale units should be set equal to the: a. average variable cost. b. average total cost. c. average total revenue. d. marginal revenue. e. marginal cost.

Marginal Cost

27. To ascertain whether the accuracy of a variable cost estimate for a project will have much effect on the final outcome of that project, you should conduct _____ analysis. a. leverage b. scenario c. break-even d. sensitivity e. cash flow

Sensitivity

3. An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis. a. forecasting b. scenario c. sensitivity d. simulation e. break-even

Sensitivity

4. An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. a. forecasting b. scenario c. sensitivity d. simulation e. break-even

Simulation

13. The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: a. marginal spending. b. average spending. c. soft rationing. d. hard rationing. e. marginal rationing.

Soft Rationing

43. 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.

The accounting break even point

25. 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 profit margin of the project. e. less volatile the project's outcome.

greater the importance of accurately predicting the value of the variable

33. As additional fixed assets are purchased for a project, the project's level of fixed costs _____ and the degree of operating leverage _____. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases e. remains constant; remains constant

increases, decreases

54. The degree of operating leverage is equal to: a. FC / OCF. b. VC / OCF. c. 1 + FC / OCF. d. 1 + VC / OCF. e. 1 FC / OCF.

1+FC/OCF

32. As the variable cost per unit increases, the: a. contribution margin decreases. b. number of units sold decreases. c. fixed cost per unit decreases. d. operating cash flow increases. e. net profit increases

Contribution margin decreases

12. The percentage change in operating cash flow relative to the percentage change in quantity sold is called the: a. marginal profit. b. degree of operating leverage. c. gross profit. d. net profit. e. contribution margin.

Degree of operating leverage

24. Assume you graph the changes in net present value against the changes in the value of a single variable used in a project. The steepness of the resulting function illustrates the: a. degree of operating leverage within the project. b. trade-off of variable versus fixed costs utilized by the project. c. range of total outcomes possible from accepting a proposed project. d. contribution margin of the project at various levels of output. e. degree of sensitivity of the project's outcome to changes in the single variable.

Degree of sensitivity of the project's outcome to change in the single variable

48. The point where a project produces a rate of return equal to the required return is known as the: a. point of zero operating leverage. b. cash break-even point. c. accounting break-even point. d. financial break-even point. e. internal break-even point.

FBE

36. The president of your firm would like to offer special sale prices to your best customers under the following terms: The prices will apply only to units purchased in excess of those normally purchased by the customer. The units purchased must be paid for in cash at the time of sale. The total quantity sold under these terms cannot exceed the excess capacity of the firm. The net profit of the firm should not be affected either positively or negatively. Given these conditions, the special sale price should be set equal to the: a. average variable cost. b. average total cost minus the marginal cost. c. sensitivity value of the variable cost. d. marginal cost. e. marginal cost minus the average fixed cost per unit.

Marginal Cost

21. When you assign the highest sales price and the lowest costs to a project, you are analyzing the project under the condition known as: a. optimistic sensitivity. b. pessimistic sensitivity. c. optimistic scenario analysis. d. pessimistic scenario analysis. e. base case scenario analysis.

Optimistic Scenario Analysis

1. Forecasting risk is defined as the: a. possibility that some proposed projects will be rejected. b. process of estimating future cash flows relative to a project. c. possibility that errors in projected cash flows will lead to incorrect decisions. d. process of ascertaining the incremental cash flows for a project. e. possibility that tax rates could change over the life of a project.

Possibility that errors in projected cash flows will lead to incorrect decisions

17. Conducting scenario analysis on a proposed project helps managers determine the: a. impact that an individual variable has on the outcome of the project. b. initial cost that will be required to implement the project. c. actual profitable life of the project. d. level of funding available for the project. e. potential range of reasonable outcomes that might be realized.

Potential range of reasonable outcomes that might be realized

45. 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 estimated sales volume is equal to the cash break-even level of sales. c. The estimated sales volume is equal to the financial break-even level of sales. 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.

The estimated sales volume is equal to the CBE

18. When conducting a best case scenario analysis, you should assume that: a. the number of units sold and the variable cost per unit are at the high end of their potential ranges. b. the salvage value will be at the high end of its possible range. c. sales quantity will be at the low end of its range while the sales price is the highest price possible. d. the variable costs per unit are at the high end of potential cost range. e. fixed costs will become variable and decrease in dollar amount.

The salvage value will be at the high end of the possible range

31. 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 are inversely related to operating cash flow.

Variable costs are inversely related to operating cash flow

28. 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

Wide Range of values to multiple variables simultaneously

53. Which one of the following will 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 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 production method to a more capital intensive method

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

8. The sales level that results in a project's net income exactly equaling zero is called the _____ break-even. a. operational b. leveraged c. accounting d. cash e. financial

Accounting

47. 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.

CBE

9. The sales level that results in a project's operating cash flow exactly equaling zero is called the _____ break-even. a. operational b. leveraged c. accounting d. cash e. financial

Cash

37. 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 divided by the sales price. e. aftertax profit per unit divided by the sales price.

Sales Price per unit minus the variable cost per unit

16. Jennie is fairly cautious when considering new opportunities and therefore analyzes each project to determine the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Jennie is using: a. forecast modeling. b. sensitivity analysis. c. break-even analysis. d. soft rationing. e. scenario analysis.

Scenario Analysis

14. Hard rationing is defined as the situation where: a. two projects have the same NPV but only one project can be financed. b. firms are forced to chose one project over another. c. divisions within a firm are granted equal amounts for capital expenditures. d. divisions within a firm request more funds for capital projects than firms have available for use. e. a firm is unable to raise the funds needed for a project from any source

A firm is unable to raise the funds needed for a project from any source

15. 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.

Accuracy of the projected cash flows

2. Scenario analysis is defined as: a. the determination of the most likely outcome for a project. b. analyzing the changes in NPV estimates when what-if questions are posed. c. isolating the effect that one variable has on the NPV of a project. d. comparing the NPV of a project both with and without considering the effects of erosion. e. determining the acceptability of a project based solely on the project's operating cash flows.

Analyzing changes in NPV estimates when what if questions are posed

6. Fixed costs: a. change as the quantity of output produced changes. b. are constant over the short-run regardless of the quantity of output produced. c. reflect the change in a variable 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.

Are constant over the short run regardless of the quantity of output produced

44. Roger just completed analyzing a project. His analysis indicates that the project will have a 5-year life and require an initial cash outlay of $225,000. Annual sales are estimated at $685,000 and the tax rate is 35 percent. The net present value is a negative $225,000. 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.

Cash BEP

5. Variable costs: a. change in direct relationship to the quantity of output produced. b. are constant in the short-run regardless of the quantity of output produced. c. reflect the change in NPV when one more unit of output is produced and sold. d. are subtracted from fixed costs to compute the contribution margin. e. are inversely related to the number of units sold.

Change in direct relationship to the quantity of output produced

11. Operating leverage is the: a. dependence of a firm on variable costs. b. percentage of a sales price that is needed to cover variable costs. c. percentage of the sales price which represents the contribution margin. d. degree to which a firm relies on fixed costs. e. amount of debt used to finance a project.

Degree to which a firm relies on fixed costs

41. All else constant, the accounting break-even level of sales will decrease when the: a. fixed costs increase. b. depreciation expense decreases. c. contribution margin decreases. d. variable costs per unit increase. e. selling price per unit decreases.

Depreciation expense decreases

50. You would like to know the minimal level of sales that is needed for a project to be accepted based on net present value. To determine that sales level you should compute the: a. contribution margin and set that margin equal to the fixed costs. b. divided the contribution margin by (1 Tax rate). c. accounting break-even point. d. cash break-even point. e. financial break-even point.

FBE

10. The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even. a. operational b. leveraged c. accounting d. cash e. financial

Financial

38. At the accounting breakeven point, the contribution margin must equal: a. total costs. b. fixed costs. c. the earnings before interest and taxes. d. fixed costs plus depreciation. e. depreciation

Fixed costs plus D

52. 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 DOL of five or greate

High variable costs relative to fixed costss

20. 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

I,III

39. Which of the following statements are correct concerning the accounting break-even point? I. The net income is equal to zero. II. The net present value is equal to zero. III. The quantity sold is equal to the total fixed costs plus depreciation divided by the contribution margin. IV. The quantity sold is equal to the total fixed costs divided by the contribution margin. a. I and III only b. I and IV only c. II and III only d. II and IV only e. I, II, and IV only

I,III

46. Which of the following are characteristics of a project with sales set at the cash breakeven point? 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

I,III

49. Which of the following statements are correct concerning the financial break-even point of a project? 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. III and IV only e. I, III, and IV only

I,III,IV

22. Which one of the following statements concerning scenario analysis is correct? a. The worst case scenario determines the maximum loss, in current dollars, that a firm could incur from a given project. b. Scenario analysis reflects the entire range of results that can be realized from a proposed investment project. c. Scenario analysis provides a clear signal to management to either accept or reject a proposed project. d. Scenario analysis provides management with a glimpse of the possible range of outcomes that could be realized from a project. e. When the base case scenario results in a positive net present value, management can be assured the proposed project will meet or exceed their expectations.

Scenario Analysis provides managemtn with glmipse of the possible range

55. Merkel Enterprises has three divisions. As part of the planning process, the CFO requested that each division submit their capital budgeting proposals for next year. These proposals all have positive net present values and fall within the long-range plans of the firm. The requests from the divisions are $6.2 million, $4.8 million, and $3.7 million, respectively. For the firm as a whole, Merkel Enterprises has a maximum of $12 million which can be spent for new projects next year. This is an example of: a. scenario analysis. b. sensitivity analysis. c. determining operating leverage. d. soft rationing. e. hard rationing.

Soft Rationing

56. Treynor United has received requests for capital investment funds from each of their five divisions for next year. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as: a. scenario analysis. b. sensitivity analysis. c. leveraging. d. hard rationing. e. soft rationing.

Soft Rationing

34. Which one of the following is a fixed cost in the short-run? a. packaging and shipping costs b. wages for a machine operator c. the cost of raw materials d. the cost of water used in the production process e. three-year lease on a delivery truck

lease on a truck

7. The change in revenue that occurs when one more unit of output is sold is called the _____ revenue. a. marginal b. average c. total d. fixed e. variable

marginal