SMRT BK 2-FIN 362
As a practical matter, it is easier to (decrease/increase) operating leverage than it is to (decrease/increase) it.
Blank 1: increase Blank 2: decrease
The basic approach to evaluating cash flow and NPV estimates involves asking -if questions.
Blank 1: what
Which of the following is an opportunity cost in the context of a vacant building that a firm currently owns?
The potential rental income lost by using the empty building for a project
A firm with higher operating leverage will have ______ fixed costs relative to a firm with low operating leverage.
high
A potential problem with DCF analysis is that a project may appear to have a positive NPV because the estimated cash flows are ______.
inaccurate
For all practical purposes, it is easier to _____.
increase operating leverage than to decrease it
Which of the following is the correct equation for the degree of operating leverage?
DOL = 1 + FC/OCF
Broadband, Inc. has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $400,000. 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.
$400,000
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 Reason: The NPV of the scenario originally estimated is usually used as the base case.
analysis involves estimating the best-case, worst-case, and base-case cash flows and calculating the corresponding NPVs. (Enter one word per blank.)
Blank 1: Scenario
What is a sunk cost?
A cost incurred in the past that is irrelevant to the capital investment decision process.
A firm with higher operating leverage will have (low/high) fixed costs relative to a firm with low operating leverage.
Blank 1: high
A potential problem with DCF analysis is that a project may appear to have a positive NPV because the estimated cash flows are
Blank 1: inaccurate, wrong, or incorrect
The _____ is the percentage change in operating cash flow relative to the percentage change in quantity sold.
DOL
What is scenario analysis?
Scenario analysis determines the impact on NPV of a set of events relating to a specific scenario.
Which of the following is an example of a sunk cost?
Research and development expense incurred in the past
If we conclude that a project has a negative NPV when the true NPV is positive, we lose a valuable opportunity.
True
From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage _____.
as low as possible
When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in _____.
asking what-if questions scenario analysis
To be considered good, projected cash flows should _____ actual cash flows.
be close to
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
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
The degree to which a firm or project relies on fixed costs is called the leverage.
operating
West Corporation estimated cash flows for a project, evaluated those cash flows using NPV, and determined that the project was acceptable. Unfortunately West Corporation lost money on the project. This may have been avoided had they assessed the ______ of the cash flow estimates.
reliability
The basic approach to evaluating cash flow and NPV estimates involves asking _____.
what-if questions
analysis determines the impact on NPV of a set of events relating to a specific situation.
Blank 1: Scenario
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
NPV considers all the cash flows. NPV considers time value of money.
