FIN 3403Chapter 11 Conceptual

Assume you graph a projects net present value given the sales quantities. Which of the following is correct regarding the resulting function

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

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the

accuracy of the projected cash flows

Fixed costs

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

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

capital rationing

When operating cash flow of a project is equal to zero, the project is operating at the

cash break even point

which of these is most associated with an IRR of -100 percent

cash break even point

Valerie just completed analyzing a project. Her analysis indicates that the project will have a six-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 NPV is negative 320,000. Based on this, the project is expected to operate at the

cash break-even point

Theresa is analyzing a project that currently has projected NPV of zero. Which of the following changes that she is considering most apt to cause that project to produce a pos npv instead?

decrease the labor hours per unit produced

which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold

degree of operating leverage

Sensitivity Analysis determines the

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

Scenario analysis is defined as the

determination of changes in NPV estimates when what-if questions are posted

Given the following, which feature identifies the most desirable level of output for a project

discounted payback period equal to the project's life

The CFO of Edward's food distributor is continually receiving capital funding request from its division managers. These requests are seeking funding for positive npv projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently the company is

facing hard rationing

Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points?

financial

You would like to know the minimum level of sales that is needed for a project to be accepted based on its NPV. To determine that sales level you should compute

financial break even point

Which of the following represents the level of output where a project produces a rate of return just equal to its requirement

financial break-even

Which of the following variables will be forecast at their highest expected level under a worst case scenario?

fixed and variable costs

Operating leverage is the degree of dependence a firm places on its

fixed cost

As the degree of sensitivity of a project to a single variable rises, the

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

hard rationing

Which of the following characteristics best describes a project that has a low degree of op leverage

high variable costs relative to the fixed costs

Scenario analysis is best suited to accomplishing which of the following when analyzing a project?

identifying the potential range of reasonable outcomes

Forecasting risk is defined as the possibility that

incorrect decisions will be made due to erroneous cash flow projections

Which of these combinations must increase the contribution margin?

increasing the sales price and decreasing the variable cost per unit

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 the level over its lifetime. Given this, you know that the project

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

the base case values in scenario analysis are the values considered to be the most

likely to occur

You are considering a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should

lowering the degree of op leverage

Steve wants to sponsor a one-week customer appreciation sale where the firm offers to sell additional units of a product at the lowest price without negatively affecting the firms profits. which of the following represents the price that should be charged of the additional units during this sale

marginal cost

The change in variable costs that occurs when production is increased by one unit is referred to as the

marginal cost

The president of Global Wholesalers would like to offer special sale prices to the firms best customers under the following terms

marginal cost of all variable inputs

Which of the following will best reduce the risk of a project by lowering the degree if op leverage

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

A project has a payback period that exactly equals the project's life. The project is operating at

the accounting break-even point

Which of the following will be used to computation of the best-case analysis of a proposed project?

the lowest variable cost per unit that can reasonably be expected

Which of the following characteristics relates to the cash break-even point for a given project

the project never pays back

Variable costs can be defined as the costs that

vary directly with sales

Simulation analysis is based on assigning a ___ and analyzing the results

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

worst case scenario analysis

The change in revenue that occurs when one more unit of output is sold is referred to as

marginal rev

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

net income

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

operating cash flow

Which of the following are inversely related to variable costs per unit?

operating cash flow per unit and contribution margin per unit

the degree of op lev is equal to

1 plus FC/OCF

A degree is which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes

sales price per unit

The contribution margin per unit is equal to the

sales price per unit minus the variable cost per unit

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. What type of analysis is steve using?

scenario analysis

Which of the following statements concerning scenario analysis is correct?

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

sensitivity

What type of analysis identifies the variable, or variables that are most critical to the success of a particular project?

sensitivity

An analysis that combines scenario analysis with sensitivity analysis is called _____ analysis

simulation

Which of the types of analysis is the most complex to conduct

simulation

Brubaker & Goss has received request for capital investment funds for next year from each of its 5 divisions...profitability index of each project since the company has insufficient funds to fulfill all of the requests

soft rationing

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called

soft rationing

Uptown Promotions has three divisions. As part of the planing process, the CFO requested that each division submit its capital budgeting proposals for next Year.... even though the firm could afford additional investments

soft rationing

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?

IRR and net income

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

IRR equals the required return

a firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspects 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 project's profitability

A project has a projected IRR of negative 100 percent. Which of the following statements must also be true concerning this project

The NPV of the project is negative and equal to the initial investment