Finance 325 test 3
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:
incremental cash flows
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
Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and 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?
equivalent annual cost
Which one of the following is an example of a sunk cost?
$1,200 paid to repair a machine last year
The operating cash flow for a project should exclude which one of the following?
interest expense
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 he using?
scenario analysis
Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?
sensitivity
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. For the firm as a whole, management has limited spending to $10 million for new projects next year even though the firm could afford additional investments. This is an example of:
soft rationing
The bottom-up approach to computing the operating cash flow applies only when:
the interest expense is equal to zero
Simulation analysis is based on assigning a ________ and analyzing the results.
wide range of values to multiple variables simultaneously
By definition, which one of the following must equal zero at the cash break-even point?
operating cash flow
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?
tax due on the current salvage value of that asset
Eglon Mills has a new Year 2020 project with an initial equipment cost of $368,000 and a project life of 10 years. The firm generally uses straight-line depreciation to a zero book value over the project's life. If the firm opts instead to use the bonus depreciation method, what is the depreciation tax shield amount for Year 2020 at a tax rate of 21 percent?
$77,280
The degree of operating leverage is equal to:
1+ (FC / OCF)
A project has a unit price of $29.99, a variable cost per unit of $9.06, fixed costs of $487,020, and depreciation expense of $38,009. Ignore taxes. What is the accounting break-even quantity?
25,085 units
You are in charge of a project that has a degree of operating leverage of 1.06. What will happen to the operating cash flows if the number of units you sell increase by 3.7 percent?
3.92 percent increase
capital will never be available for this project Financial distress Pre-existing contractual agreement
Hard rationing
Assume both the discount and tax rates are positive values. At the financial break-even point, the:
IRR equals the required return
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:
accepted because the profitability index is greater than 1
The depreciation tax shield is best defined as the:
amount of tax that is saved because of the depreciation expense
Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?
financial break-even
PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:
hard rationing
Kelley's Baskets makes handmade baskets and 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?
hiring additional employees to handle the increased workload should the firm accept the wreath project
Forecasting risk is defined as the possibility that:
incorrect decisions will be made due to erroneous cash flow projections
The change in revenue that occurs when one more unit of output is sold is referred to as:
marginal revenue
By definition, which one of the following must equal zero at the accounting break-even point?
net income
A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key 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?
Sensitivity analysis; to identify the key variable that affects a project's profitability
the limited resources are temporary, often self-imposed
Soft rationing
Which one of the following would make a mutually exclusive project unacceptable?
an equivalent annual cost that exceeds that of an alternative project
Forecasting risk is defined as the possibility that:
incorrect decisions will be made due to erroneous cash flow projections.
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?
incremental
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?
stand-alone principle
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:
worst-case scenario analysis
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.
