FIN Module 14

Which one of the following will be used in 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.

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- OCF that is highly sensitive to the sales quantity D- High level of forecasting risk E- High depreciation expense

A- High variable costs relative to the fixed costs

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. A- Sales price per unit B- Management salaries C- Variable labor costs per unit D- Initial fixed asset purchases E- Fixed costs

A- Sales price per unit

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? 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

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

A project has a unit sales price of $13.39, a variable cost per unit of $5.48, fixed costs of $3,000, and depreciation expense of $830. Ignore taxes. What is the accounting break-even quantity? A- 727 units B- 484 units C- 274 units D- 295 units E- 794 units

B- 484 units QAccounting break-even = ($3,000 + 830)/($13.39 − 5.48) QAccounting break-even = 484 units

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

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.

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 initial 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.

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- depreciation tax shield.

B- fixed costs.

A proposed project has fixed costs of $39,480, depreciation expense of $8,724, and a sales quantity of 1,330 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point? A- $37.81 B- $34.63 C- $36.24 D- $35.16 E- $38.13

C- $36.24 Contribution margin = ($39,480 + 8,724)/1,330 Contribution margin = $36.24

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.

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

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.

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 noncash expenses. E- are inversely related to the number of units sold.

C- vary directly with sales.

By definition, which one of the following must equal zero at the accounting break-even point? A- Net present value B- Depreciation C- Contribution margin D- Net income E- Operating cash flow

D- Net income

Chokkar Plastics is considering an expansion project with estimated fixed costs of $39,800, depreciation of $22,800, variable costs per unit of $5.74, and an estimated sales price of $12.99 per unit. How many units must the firm sell to break even on a cash basis? A- 3,145 units B- 1,802 units C- 2,345 units D- 8,634 units E- 5,490 units

E- 5,490 units QCash break-even = $39,800/($12.99 − 5.74) QCash break-even = 5,490 units

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 increasing 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

E- Increasing the sales price and decreasing the variable cost per unit

Humberto 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 he using? A- Simulation testing B- Sensitivity analysis C- Break-even analysis D- Rationing analysis E- Scenario analysis

E- Scenario analysis

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.

E- likely to occur.