Chapter 11 Fin 3403

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

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.

Capital Rationing

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.

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.

Determination of changes in NPV estimates when what-if questions are posed

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is: A. Operating at the accounting break-even point. B. Operating at the financial break-even point. C. Facing hard rationing. D. Operating with zero leverage. E. Operating at maximum capacity.

Facing hard rationing

Which of the following variables will be forecast at their highest expected level under a worst case scenario? A. Fixed costs and salvage value. B. Variable costs and sales price C. Fixed costs and sales price. D. Fixed and variable costs. E. Initial cost and salvage value.

Fixed and variable costs

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

Greater is the importance of accurately predicting the value of that variable

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.

Hard rationing

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.

Incorrect decisions will be made due to erroneous cash flow projections

Which one of these combinations must increase the contribution margin? A. Increasing both the sales price and the variable cost per unit B. Increasing the sales quantity and decreasing the variable cost per unit. C. Decreasing the sales price and increasing the sales quantity. D. Decreasing both fixed costs and depreciation expense. E. Increasing the sales price and decreasing the variable cost per unit.

Increasing the sales price and decreasing the variable cost per unit

The base case values used in scenario analysis are the values considered to be the most: A. Optimistic. B. Desired by management. C. Pessimistic. D. Likely to create a positive net present value. E. Likely to occur.

Likely to occur

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.

Scenario analysis

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.

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

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

Sensitivity

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? A. Scenario B. Simulation C. Break-even D. Sensitivity E. Cash flow

Sensitivity

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why? A. Sensitivity analysis; to identify the key variable that affects a project's profitability. B. Scenario analysis; to guarantee each project will be profitable. C. Cash breakeven; to ensure the firm recoups its initial investment. D. Accounting breakeven; to ensure each project earns its required rate of return. E. Financial breakeven; to ensure each project has a positive NPV.

Sensitivity analysis; to identify the key variable that affects a project's profitability

An analysis that combines scenario analysis with sensitivity analysis is called _____ analysis. A. Forecasting B. Combined C. Complex D. Simulation E. Break-even

Simulation

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

Simulation

Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. 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

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.

Soft rationing

Uptown Promotions has three divisions. As part of the planning process, the CFO requested that each division submit its capital budgeting proposals for next year. These proposals represent positive net present value projects that fall within the long-range plans of the firm. The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of: A. Scenario analysis. B. Sensitivity analysis. C. An operating leverage application. D. Soft rationing. E. Hard rationing.

Soft rationing

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

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.

The lowest variable cost per unit that can reasonably be expected

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.

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

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

When you assign the highest anticipated sales price and the lowest 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.

Worst case scenario analysis

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 breakeven on an accounting basis. E. Determining the minimal level of sales required to breakeven on a financial basis.

identifying the potential range of reasonable outcomes