Chapter 11 Practice Questions

Which of the following equations correctly relates OCF to sales volume?

(P-v) * Q - FC

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 base case is usually the original projected cash flows

What is a sunk cost?

A cost incurred in the past that is irrelevant to the capital investment decision process.

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.

Which of the following is a fixed cost for a tire manufacturing business?

Building rent Manager's salary

The CFO of Shelby & Muhammad receives frequent capital funding requests from the firm's divisionmanagers. These requests are seeking funding for positive net present value projects. The CFOcontinues to deny all funding requests due to the financial situation of the company. Apparently, thecompany is:

Facing Hard Rationing

Assume both the discount and tax rates are positive values. At the financial break-even point, the:

IRR (internal rate of return) equals the required return

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.

By definition, which one of the following must equal zero at the accounting break-even point?

Net Income

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the most critical 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?

Sensitivity Analysis; to identify the key variable that affects a projects profitability

What is the purpose of accounting profit break-even analysis?

To determine the level of sales at which profits are equal to zero.

Which of the following are true about variable costs?

Total variable costs increase as the total number of units produced increases. The variable cost per unit may remain constant as the number of units produced increases.

From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage _____.

as low as possible

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

Anya just completed analyzing a project. Her analysis indicates that the project will have a six-year life and require an initial cash outlay of $98,000. Annual sales are estimated at $64,000 and the tax rate is 21 percent. The net present value is negative $98,000. Based on this analysis, the project is expected to operate at the:

cash break-even point

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? a) Lowering the projected selling price per unit b)Buying equipment rather than leasing it short-term c)Hiring additional employees rather than using temporary outside contractors d) Changing the proposed labor-intensive production method to a more capital intensive method e) Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

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

The break-even is the sales level that results in a zero NPV.

financial

You would like to know the minimum level of sales that is needed for a project to be acceptedbased on its net present value. To determine that sales level you should compute the

financial break even point

The possibility that errors in projected cash flows will lead to incorrect decisions is known as _____.

forecasting risk estimation risk

A firm with higher operating leverage will have ______ fixed costs relative to a firm with low operating leverage.

high

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 information, you know that the project:

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

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

A fixed cost is a cost that _____.

remains constant as the level of business activity changes

Which of the following is a fixed cost for a garment manufacturing business?

rent for the building

In a simulation, the average NPV and the spread of NPVs around the average are determined by _____.

repeated random drawings

scenario Blank 1Blank 1 scenario , Correct Unavailable analysis involves estimating the best-case, worst-case, and base-case cash flows and calculating the corresponding NPVs

scenario

Combining scenario analysis with sensitivity analysis can yield a crude form of _____ analysis.

simulation

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. Multiple choice question.

soft

In a competitive market, positive NPV projects are:

uncommon

The basic approach to evaluating cash flow and NPV estimates involves asking _____.

what-if questions