fin3403 concepts
The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A. incremental cash flows. B. internal cash flows. C. external cash flows. D. erosion effects. E. financing cash flows.
a
Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications? A. IRR B. ACRS C. AAR D. straight-line to zero E. straight-line with salvage
b
The change in revenue that occurs when one more unit of output is sold is referred to as: A. marginal revenue. B. average revenue. C. total revenue. D. erosion. E. scenario revenue.
A
Which of the following characteristics relate to the cash break-even point for a given project? 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
A
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
C
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.
D
Which of the following are inversely related to variable costs per unit? I. contribution margin per unit II. number of units sold III. operating cash flow per unit IV. net profit per unit A. I and II only B. III and IV only C. II, III, and IV only D. I, III, and IV only E. I, II, III, and IV
D
The operating cash flow of a cost cutting project: A. is equal to the depreciation tax shield. B. is equal to zero because there is no incremental sales. C. can only be analyzed by projecting the sales and costs for a firm's entire operations. D. includes any changes that occur in the current accounts. E. can be positive even though there are no sales.
e
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 per unit equals the fixed costs per unit. E. contribution margin per unit is zero.
C
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.
C
All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project A. I and II only B. I and IV only C. II and IV only D. I, II, and IV only E. I, II, III, and IV
b
The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? A. underlying value principle B. stand-alone principle C. equivalent cost principle D. salvage principle E. fundamental principle
b
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 per unit. C. increase the initial cash outlay. D. increase the fixed costs per unit while lowering the contribution margin per unit. E. lower the operating cash flow of the project.
A
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
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. net working capital.
B
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.
B
Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. is rarely affected when a new product is introduced. D. can create either a cash inflow or a cash outflow at time zero of a project. E. is the only expenditure where at least a partial recovery can be made at the end of a project.
d
Sensitivity analysis is based on: A. varying a single variable and measuring the resulting change in the NPV of a project. B. applying differing discount rates to a project's cash flows and measuring the effect on the NPV. C. expanding and contracting the number of years for a project to determine the optimal project length. D. the best, worst, and most expected situations. E. various states of the economy and the probability of each state occurring.
A
The change in variable costs that occurs when production is increased by one unit is referred to as the: A. marginal cost. B. average cost. C. total cost. D. scenario cost. E. net cost.
A
Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct? A. As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B. The new machine will have a zero rate of return. C. The new machine will generate positive operating cash flows, at least in the first few years of its life. D. The new machine will create a cash outflow when the firm disposes of it at the end of its life. E. The new machine creates erosion effects.
C
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.
D
An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. A. forecasting B. combined C. complex D. simulation E. break-even
D
An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used. I. annual salary for the firm's president II. contribution margin per unit III. cost of equipment required by a project IV. variable cost per unit A. I and III only B. I and IV only C. II and III only D. I, III, and IV only E. I, II, and IV only
D
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
D
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.
E
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.
E
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.
E
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
E
Theresa is analyzing a project that currently has a projected NPV of zero. Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently. I. increase the quantity sold II. decrease the fixed leasing cost for equipment III. decrease the labor hours needed to produce one unit IV. increase the sales price A. I and II only B. I and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV
E
A company that utilizes the MACRS system of depreciation: A. will have equal depreciation costs each year of an asset's life. B. will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life. C. can depreciate the cost of land, if it so desires. D. will expense less than the entire cost of an asset. E. cannot expense any of the cost of a new asset during the first year of the asset's life.
b
Which one of the following statements is correct concerning bid prices? A. The bid price is the maximum price that a firm should bid. B. A firm can submit a bid that is higher than the computed bid price and still break even. C. A bid price ignores taxes. D. A bid price should be computed based solely on the operating cash flows of the project. E. A bid price should be computed based on a zero percent required rate of return.
b
Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV
c
Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? A. storing supplies in the same space currently used for materials storage B. utilizing the basket manager to oversee wreath production C. hiring additional employees to handle the increased workload should the firm accept the wreath project D. researching the market to determine if wreath sales might be profitable before deciding to proceed E. planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt
c
Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A. Sale price + (Sales price - Book value) × T B. Sale price + (Sales price - Book value) × (1 - T) C. Sale price + (Book value - Sale price) × T D. Sale price + (Book value - Sale price) × (1 - T) E. Sale price × (1 - T)
c
Which one of the following best describes pro forma financial statements? A. financial statements expressed in a foreign currency B. financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales C. financial statements showing projected values for future time periods D. financial statements expressed in real dollars, given a stated base year E. financial statements where all accounts are expressed as a percentage of last year's values
c
Which one of the following best describes the concept of erosion? A. expenses that have already been incurred and cannot be recovered B. change in net working capital related to implementing a new project C. the cash flows of a new project that come at the expense of a firm's existing cash flows D. the alternative that is forfeited when a fixed asset is utilized by a project E. the differences in a firm's cash flows with and without a particular project
c
Which one of the following costs was incurred in the past and cannot be recouped? A. incremental B. side C. sunk D. opportunity E. erosion
c
Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? A. EBIT + D B. EBIT - T C. NI + D D. (Sales - Costs) × (1 - D) × (1- T) E. (Sales - Costs) × (1 - T)
c
Which one of the following is a project cash inflow? Ignore any tax effects. A. decrease in accounts payable B. increase in inventory C. decrease in accounts receivable D. depreciation expense based on MACRS E. equipment acquisition
c
Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product 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
d
Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals. A. I and II only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV
e
The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? A. yearly incremental costs B. sunk costs C. opportunity costs D. erosion cost E. equivalent annual cost
e
The net book value of equipment will: A. remain constant over the life of the equipment. B. vary in response to changes in the market value. C. decrease at a constant rate when MACRS depreciation is used. D. increase over the taxable life of an asset. E. decrease slower under straight-line depreciation than under MACRS.
e
You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the: A. longest life. B. highest annual operating cost. C. lowest annual operating cost. D. highest equivalent annual cost. E. lowest equivalent annual cost.
e
Decreasing which one of the following will increase the acceptability of a project? A. sunk costs B. salvage value C. depreciation tax shield D. equivalent annual cost E. accounts payable requirement
D
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 operating cash flow is positive and equal to the depreciation. C. The net present value of the project is negative and equal to the initial investment. 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.
C
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 sensitivity of the project to the other variable inputs. E. less volatile the project's outcome.
C
Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision? A. internal rate of return B. operating cash flow C. equivalent annual cost D. depreciation tax shield E. bottom-up operating cash flow
C
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
Given the following, which feature identifies the most desirable level of output for a project? A. operating cash flow equal to the depreciation expense B. payback period equal to the project's life C. discounted payback period equal to the project's life D. zero IRR E. zero operating cash flow
C
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 break-even on an accounting basis E. determining the minimal level of sales required to break-even on a financial basis
C
The bid price always assumes which one of the following? A. A project has a one-year life. B. The aftertax net income of the project is zero. C. The net present value of the project is zero. D. Any assets purchased will have a positive salvage value at the end of the project. E. Assets will be depreciated based on MACRS.
C
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. E. aftertax profit per unit.
C
The degree of operating leverage is equal to: A. the percentage change in quantity divided by the percentage change in OCF. B. the percentage change in sales divided by the percentage change in OCF. C. 1 + FC/OCF. D. 1 + VC/OCF. E. 1 - (FC + VC)/OCF.
C
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.
C
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 non-cash expenses. E. are inversely related to the number of units sold.
C
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. providing both ketchup and mustard for its customer's use B. repairing the roof of the hot dog stand because of water damage C. selling fewer hot dogs because hamburgers were added to the menu D. offering French fries but not onion rings E. losing sales due to bad weather
c
The depreciation tax shield is best defined as the: A. amount of tax that is saved when an asset is purchased. B. tax that is avoided when an asset is sold as salvage. C. amount of tax that is due when an asset is sold. D. amount of tax that is saved because of the depreciation expense. E. amount by which the aftertax depreciation expense lowers net income.
d
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. sunk B. total C. variable D. incremental E. fixed
d
The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? A. salvage value B. wasted value C. sunk cost D. opportunity cost E. erosion
d
The operating cash flow for a project should exclude which one of the following? A. taxes B. variable costs C. fixed costs D. interest expense E. depreciation tax shield
d
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 high depreciation expense
A
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.
B
Ted is analyzing a project using simulation. His focus is limited to the short-term. To ease the simulation process, he is combining expenses into various categories. Which one of the following should he include in the fixed cost category? A. production department payroll taxes B. equipment insurance C. sales tax D. raw materials E. product shipping costs
B
The bottom-up approach to computing the operating cash flow applies only when: A. both the depreciation expense and the interest expense are equal to zero. B. the interest expense is equal to zero. C. the project is a cost-cutting project. D. no fixed assets are required for a project. E. both taxes and the interest expense are equal to zero.
B
When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at end of economic life IV. differing initial cost A. I and II B. I and III C. I and IV D. II and IIII E. II and IV
B
Which of the following statements are identified with financial break-even point? 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. I, II, and III only E. I, III, and IV only
B
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
Which one of the following will best 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 production 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 labor-intensive production method to a more capital intensive method
B
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, you know that the project: A. will never pay back. B. has a zero net present value. C. is operating at a higher level than if it were operating at its cash break-even level. D. is operating at a higher level than if it were operating at its financial break-even level. E. is lowering the total net income of the firm.
C
Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I. operating cash flow II. internal rate of return III. net income IV. payback period A. I only B. III only C. II and III only D. I and IV only E. I, II, and III only
C
Which one of the following would make a project unacceptable? A. cash inflow for net working capital at time zero B. requiring fixed assets that would have no salvage value C. an equivalent annual cost that exceeds that of an alternative project D. lack of revenue generation E. a depreciation tax shield that exceeds the value of the interest expense
C
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
D
By definition, which one of the following must equal zero at the accounting break-even point? A. net present value B. internal rate of return C. contribution margin D. net income E. operating cash flow
D
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, respectively. For the firm as a whole, the management of Uptown Promotions has limited spending to $10 million 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.
D
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
Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? A. capital break-even B. cash break-even C. accounting break-even D. financial break-even E. internal break-even
D
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.
D
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
D
Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? A. leverage B. risk C. break-even D. sensitivity E. cash flow
D
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.
E
By definition, which one of the following must equal zero at the cash break-even point? A. net present value B. internal rate of return C. contribution margin D. net income E. operating cash flow
E
Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? A. average variable cost B. average total cost C. average total revenue D. marginal revenue E. marginal cost
E
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.
E
The equivalent annual cost considers which of the following? I. required rate of return II. operating costs III. need for replacement IV. economic life A. I and II only B. II and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV
E
The equivalent annual cost method is useful in determining: A. which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. B. the tax shield benefits of depreciation given the purchase of new assets for a project. C. the operating cash flows of a cost-cutting project. D. which one of two investments to accept when the investments have different required rates of return. E. which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.
E
The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms: 1. The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. 2. The units purchased must be paid for in cash at the time of sale. 3. The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4. The net profit of the firm should not be affected. 5. The prices will be in effect for one week only.Given these conditions, the special sale price should be set equal to the: A. average variable cost of materials only. B. average cost of all variable inputs. C. sensitivity value of the variable costs. D. marginal cost of materials only. E. marginal cost of all variable inputs.
E
Valerie just completed analyzing a project. Her analysis indicates that the project will have a 6-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 net present value is a negative $320,000. 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.
E
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.
E
Which one of the following is defined as the sales level that corresponds to a zero NPV? A. accounting break-even B. leveraged break-even C. marginal break-even D. cash break-even E. financial break-even
E
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 per unit are inversely related to the contribution margin per unit.
E
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
E
You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the: A. contribution margin per unit and set that margin equal to the fixed costs per unit. B. contribution margin per unit. C. accounting break-even point. D. cash break-even point. E. financial break-even point.
E
Changes in the net working capital requirements: A. can affect the cash flows of a project every year of the project's life. B. only affect the initial cash flows of a project. C. only affect the cash flow at time zero and the final year of a project. D. are generally excluded from project analysis due to their irrelevance to the total project. E. reflect only the changes in the current asset accounts.
a
The top-down approach to computing the operating cash flow: A. ignores noncash expenses. B. applies only if a project increases sales. C. applies only to cost cutting projects. D. is equal to sales - costs - taxes + depreciation. E. is used solely to compute a bid price.
a
The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A. depreciation tax shield B. tax due on the salvage value of that asset C. current year's operating cash flow D. change in net working capital E. MACRS depreciation for the current year
b
Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock B. $1,200 paid to repair a machine last year C. $20,000 project that must be forfeited if another project is accepted D. $4,500 reduction in current shoe sales if a store commences selling sandals E. $1,800 increase in comic book sales if a store commences selling puzzles
b
Which one of the following statements is correct? A. Project analysis should only include the cash flows that affect the income statement. B. A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a project. D. Interest expense should always be included as a cash outflow when analyzing a project. E. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.
b
G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? A. opportunity B. fixed C. incremental D. erosion E. sunk
e
Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? A. erosion effects B. taxes C. fixed expenses D. salaries E. depreciation expense
e
The bid price is: A. an aftertax price. B. the aftertax contribution margin. C. the highest price you should charge if you want the project. D. the only price you can bid if the project is to be profitable. E. the minimum price you should charge if you want to earn a target return on investment.
e
Which one of the following will increase a bid price? A. a decrease in the fixed costs B. a reduction in the net working capital requirement C. a reduction in the firm's tax rate D. an increase in the salvage value E. an increase in the required rate of return
e