Homeworks 3&4

Which of the following statements are true regarding financial break-even point?

Accounting BE is the sales level that results in zero project net income. The cash BE is the sales level that results in zero OCF. The financial BE is the sales level that results in zero NPV. Of the three break-evens, the financial break-even point is typically the highest

The payback rule can best be stated as:

An investment is acceptable if its calculated payback period is less than some pre-specified number of years

A firm has a DOL = 2.5. If sales decrease by 20%, then OCF will:

Decrease by 50%

What is NOT true about a negative NPV?

Have a discounted payback period less than the project's life. Have a sales level exceeding the accounting break-even point.

A negative NPV project will:

Have an IRR less than the required return and have a profitability index less than one

Suppose, the project has OCF of $55000 and its fixed costs are $7000.All else the same, if fixed costs increase to $7300 (sales and other costs stay the same)which of the following will be true?

Operating leverage will increase. Accounting break-even will increase. Cash break-even increase. Operating cash flow will NOT increase.

As the required rate of return increases for the project (with conventional cash flows), then the:

Profitability index decreases. Discounted payback period increases. The NPV of project does NOT increase. The ordinary payback period does NOT decrease.

Suppose you consider 2 mutually exclusive projects A and B. Both projects have conventional cash flows and identical initial investments. Project A has cash flows that gradually increase from one period to the next, while cash flows of project B gradually decline. Both projects have the same duration. Given current discount rate, both projects have the same NPV. Alan Greenspan will decrease interest rate next week, which will decrease the discount rate. Which project will likely have higher NPV if, indeed, discount rate decreases?

Project A.

Which of the following is NOT a correct statement regarding break-even?

The payback period is equal to the life of the project. If there is depreciation the cash break-even will exceed the accounting break-even

The internal rates of return on a project is 9%. Which of the following are true if the discount rate is 7%?

The profitability index will be greater than 1.0. The initial investment is less than the present value of the projects cash inflows. The undercounted payback period is shorter than the projects life.

The internal rates of return on a project is 9%. Which of the following is false if the discount rate is 7%?

The project will have a negative NPV

A project whose NPV equals zero:

is expected to earn a return equal to the firms required return

If a firm's fixed costs are exactly equal to its depreciation expense, and both are greater than zero, then at its cash break-even point the DOL is:

undefined since you can't divide by zero