Ch11 Project Analysis And Evaluation Test Bank Docx

1.

Forecasting risk is defined as the possibility that: 
 

2.

Scenario analysis is defined as the: 
 

3.

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis. 
 

4.

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. 
 

5.

Variable costs can be defined as the costs that: 
 

6.

Fixed costs: 
 

7.

The change in revenue that occurs when one more unit of output is sold is referred to as: 
 

8.

The change in variable costs that occurs when production is increased by one unit is referred to as the: 
 

9.

By definition, which one of the following must equal zero at the accounting break-even point? 
 

10.

By definition, which one of the following must equal zero at the cash break-even point? 
 

11.

Which one of the following is defined as the sales level that corresponds to a zero NPV? 
 

12.

Operating leverage is the degree of dependence a firm places on its: 
 

13.

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? 
 

14.

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: 
 

15.

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: 
 

16.

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: 
 

17.

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: 
 

18.

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? 
 

19.

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? 
 

20.

Which one of the following will be used in the computation of the best-case analysis of a proposed project? 
 

21.

The base case values used in scenario analysis are the ones considered the most: 
 

22.

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 
 

23.

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: 
 

24.

Which one of the following statements concerning scenario analysis is correct? 
 

25.

Sensitivity analysis determines the: 
 

26.

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function? 
 

27.

As the degree of sensitivity of a project to a single variable rises, the: 
 

28.

Sensitivity analysis is based on: 
 

29.

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? 
 

30.

Simulation analysis is based on assigning a _____ and analyzing the results. 
 

31.

Which one of the following types of analysis is the most complex to conduct? 
 

32.

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? 
 

33.

Which one of the following statements concerning variable costs is correct? 
 

34.

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 
 

35.

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? 
 

36.

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: 
 

37.

The contribution margin per unit is equal to the: 
 

38.

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 
 

39.

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 
 

40.

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: 
 

41.

Given the following, which feature identifies the most desirable level of output for a project? 
 

42.

At the accounting break-even point, the: 
 

43.

A project has a payback period that exactly equals the project's life. The project is operating at: 
 

44.

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: 
 

45.

A project has a projected IRR of negative 100 percent. Which one of the following statements must also be true concerning this project? 
 

46.

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. 
 

47.

When the operating cash flow of a project is equal to zero, the project is operating at the: 
 

48.

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? 
 

49.

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. 
 

50.

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: 
 

51.

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 
 

52.

You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could: 
 

53.

Which one of the following characteristics best describes a project that has a low degree of operating leverage? 
 

54.

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? 
 

55.

The degree of operating leverage is equal to: 
 

56.

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: 
 

57.

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: 
 

58.

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: 
 

59.

Precise Machinery is analyzing a proposed project. The company expects to sell 2,300 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, plus or minus 3 percent. What is the sales revenue under the worst case scenario? 
 

60.

Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. What is the contribution margin per unit under the best case scenario? 
 

61.

Precise Machinery is analyzing a proposed project. The company expects to sell 2,250 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. What is the amount of the total costs per unit under the worst case scenario? 
 

62.

Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $750 per unit, give or take 2 percent. The tax rate is 35 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $755. What is the operating cash flow based on this analysis? 
 

63.

Precise Machinery is analyzing a proposed project. The company expects to sell 2,100 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $129,000. The sales price is estimated at $775 per unit, give or take 2 percent. The tax rate is 34 percent. The company is conducting a sensitivity analysis with fixed costs of $590,000. What is the OCF given this analysis? 
 

64.

Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 2 percent. The expected variable cost per unit is $11 and the expected fixed costs are $287,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, plus or minus 3 percent. What is the earnings before interest and taxes under the base case scenario? 
 

65.

Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 4 percent. The expected variable cost per unit is $11 and the expected fixed costs are $290,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent. What is the operating cash flow under the best case scenario? 
 

66.

Miller Mfg. is analyzing a proposed project. The company expects to sell 8,000 units, plus or minus 2 percent. The expected variable cost per unit is $11 and the expected fixed costs are $287,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $68,000. The tax rate is 32 percent. The sales price is estimated at $64 a unit, give or take 3 percent. What is the net income under the worst case scenario? 
 

67.

Stellar Plastics is analyzing a proposed project. The company expects to sell 12,000 units, plus or minus 5 percent. The expected variable cost per unit is $3.20 and the expected fixed costs are $30,000. The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $24,000. The tax rate is 34 percent. The sales price is estimated at $7.50 a unit, plus or minus 4 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $31,000? 
 

68.

Sunset United is analyzing a proposed project. The company expects to sell 15,000 units, plus or minus 4 percent. The expected variable cost per unit is $120 and the expected fixed costs are $311,000. The fixed and variable cost estimates are considered accurate within a plus or minus 3 percent range. The depreciation expense is $74,000. The tax rate is 35 percent. The sales price is estimated at $170 a unit, plus or minus 2 percent. What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $125? 
 

69.

Your company is reviewing a project with estimated labor costs of $21.20 per unit, estimated raw material costs of $37.18 a unit, and estimated fixed costs of $20,000 a month. Sales are projected at 42,000 units over the one-year life of the project. All estimates are accurate within a range of plus or minus 4 percent. What are the total variable costs for the worst-case scenario? 
 

70.

A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units. All estimates are accurate within a plus/minus range of 3 percent. Depreciation is $12,000. What is the base case variable cost per unit? 
 

71.

At a production level of 4,500 units, a project has total costs of $107,000. The variable cost per unit is $12.50. Assume the firm can increase production by 1,000 units without increasing its fixed costs. What will the total costs be if 4,800 units are produced? 
 

72.

A company is considering a project with a cash break-even point of 22,600 units. The selling price is $28 a unit, the variable cost per unit is $13, and depreciation is $14,000. What is the projected amount of fixed costs? 
 

73.

At the accounting break-even point, Swiss Mountain Gear sells 14,600 ski masks at a price of $12 each. At this level of production, the depreciation is $58,000 and the variable cost per unit is $4. What is the amount of the fixed costs at this production level? 
 

74.

The Coffee Express has computed its fixed costs to be $0.34 for every cup of coffee it sells given annual sales of 212,000 cups. The sales price is $1.49 per cup while the variable cost per cup is $0.63. How many cups of coffee must it sell to break-even on a cash basis? 
 

75.

The Metal Shop produces 1.8 million metal fasteners a year for industrial use. At this level of production, its total fixed costs are $320,000 and its total costs are $522,000. The firm can increase its production by 5 percent, without increasing either its total fixed costs or its variable costs per unit. A customer has made a one-time offer for an additional 50,000 units at a price per unit of $0.10. Should the firm sell the additional units at the offered price? Why or why not? 
 

76.

Wexford Industrial Supply is considering a new project with estimated depreciation of $26,000, fixed costs of $79,000, and total sales of $187,000. The variable costs per unit are estimated at $11.80. What is the accounting break-even level of production? 
 

77.

The accounting break-even production quantity for a project is 12,320 units. The fixed costs are $216,000 and the contribution margin per unit is $28. The fixed assets required for the project will be depreciated on straight-line basis to zero over the project's 5-year life. What is the amount of fixed assets required for this project? 
 

78.

A project has an accounting break-even point of 15,329 units. The fixed costs are $382,000 and the projected variable cost per unit is $29.10. The project will require $780,000 for fixed assets which will be depreciated straight-line to zero over the project's 6-year life. What is the projected sales price per unit? 
 

79.

A proposed project has fixed costs of $9,800, depreciation expense of $2,550, and a sales quantity of 2,100 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? 
 

80.

Spencer Tools would like to offer a special product to its best customers. However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment in the project. The fixed costs are estimated at $21,000, the depreciation expense is $11,000, and the contribution margin per unit is $12.50. What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level? 
 

81.

The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $26.50 per unit. How many units must the firm sell to break-even on a cash basis? 
 

82.

A proposed project has a contribution margin per unit of $13.10, fixed costs of $74,000, depreciation of $12,500, variable costs per unit of $22, and a financial break-even point of 11,360 units. What is the operating cash flow at this level of output? 
 

83.

Cantor's has been busy analyzing a new product. Thus far, management has determined that an OCF of $218,200 will result in a zero net present value for the project, which is the minimum requirement for project acceptance. The fixed costs are $329,000 and the contribution margin per unit is $211. The company feels that it can realistically capture 2.5 percent of the 110,000 unit market for this product. The tax rate is 34 percent and the required rate of return is 11 percent. Should the company develop the new product? Why or why not? 
 

84.

Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life. The projections include a sales price of $38, variable cost per unit of $18.50, and fixed costs of $32,000. The operating cash flow is $19,700. What is the break-even quantity? 
 

85.

You are in charge of a project that has a degree of operating leverage of 2.64. What will happen to the operating cash flows if the number of units you sell increase by 4 percent? 
 

86.

The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 2 percent, the operating cash flow increases by 5.3 percent. What is the degree of operating leverage if the contribution margin per unit is $47? 
 

87.

Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project. Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000. What is the degree of operating leverage for this project? 
 

88.

You are the manager of a project that has a 2.8 degree of operating leverage and a required return of 14 percent. Due to the current state of the economy, you expect sales to decrease by 7 percent next year. What change should you expect in the operating cash flows next year given your sales prediction? 
 

89.

Cool Shades, Inc. (CSI) manufactures biotech sunglasses. The variable materials cost is $1.69 per unit, and the variable labor cost is $3.04 per unit. Suppose the firm incurs fixed costs of $750,000 during a year in which total production is 450,000 units and the selling price is $11.50 per unit. What is the cash break-even point? 
 

90.

Mountain Gear can manufacture mountain climbing shoes for $15.25 per pair in variable raw material costs and $18.46 per paid in variable labor costs. The shoes sell for $135 per pair. Last year, production was 170,000 pairs and fixed costs were $830,000. What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 10,000 pairs? 
 

91.

We are evaluating a project that costs $854,000, has a 15-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 154,000 units per year. Price per unit is $41, variable cost per unit is $20, and fixed costs are $865,102 per year. The tax rate is 33 percent, and we require a 14 percent return on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±14 percent. What is the worst-case NPV? 
 

92.

A project has a unit price of $5,000, a variable cost per unit of $3,750, fixed costs of $17,000,000, and depreciation expense of $6,970,000. What is the accounting break-even quantity? 
 

93.

A project has the following estimated data: price = $74 per unit; variable costs = $39.22 per unit; fixed costs = $6,500; required return = 8 percent; initial investment = $8,000; life = 4 years. Ignore the effect of taxes. What is the degree of operating leverage at the financial break-even level of output? 
 

94.

Consider a project with the following data: accounting break-even quantity = 29,000 units; cash break-even quantity = 16,250 units; life = 10 years; fixed costs = $203,000; variable costs = $24 per unit; required return = 14 percent; depreciation = straight line. Ignoring the effect of taxes, what is the financial break-even quantity? 
 

95.

At an output level of 50,000 units, you calculate that the degree of operating leverage is 1.8. What will be the percentage change in operating cash flow if the new output level is 54,500 units? 
 

96.

A proposed project has fixed costs of $36,000 per year. The operating cash flow at 18,000 units is $58,000. What will be the new degree of operating leverage if the number of units sold rises to 18,500? 
 

97.

Consider a 6-year project with the following information: initial fixed asset investment = $460,000; straight-line depreciation to zero over the 6-year life; zero salvage value; price = $34; variable costs = $19; fixed costs = $188,600; quantity sold = 90,528 units; tax rate = 32 percent. What is the sensitivity of OCF to changes in quantity sold? 
 

98.

You are considering a new product launch. The project will cost $630,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per year, price per unit will be $24,000, variable cost per unit will be $12,000, and fixed costs will be $283,000 per year. The required return is 12 percent and the relevant tax rate is 34 percent. Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±9 percent. What is the worst case NPV? 
 

99.

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500 per set and have a variable cost of $200 per set. The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years. The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of $300. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year will be $7,559,000. The company has also spent $1,133,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis over the life of the project. The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 8 percent. What is the IRR? 
 

100.

Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider a hybrid model that has a list price of $5,500 (including tax consequences) more than a comparable car with a traditional gasoline engine. Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $420 more than the traditional model. The EPA mileage estimate is 23 mpg for the traditional model and 25 mpg for the hybrid model. Assume the appropriate interest rate is 10 percent, all cash flows occur at the end of the year, you drive 15,900 miles per year, and keep either car for 6 years. What price per gallon would make the decision to buy they hybrid worthwhile? 
 

101.

In an effort to capture the large jet market, Hiro Airplanes invested $12.68 billion developing its B490, which is capable of carrying 800 passengers. The plane has a list price of $275 million. In discussing the plane, Hiro Airplanes stated that the company would break-even when 246 B490s were sold. Assume the break-even sales figure given is the cash flow break-even. Suppose the sales of the B490 last for only 9 years. How many airplanes must Hiro Airplanes sell per year to provide its shareholders a 19 percent rate of return on this investment? 
 

102.

What is operating leverage and why is it important in the analysis of capital expenditure projects? 
 

103.

What is forecasting risk and why is it important to the analysis of capital expenditure projects? What methods can be used to reduce this risk? 
 

104.

What are the key features of the accounting, cash, and financial break-even points? 
 

105.

Assume that a country experiences a financial crisis that causes the nation's financial markets to freeze in a manner that prevents a private firm from raising capital from any source. Explain how project analysis conducted by that firm would work in this situation. 
 

106.

Mr. Bear, your boss, will only agree to accept a project that, as a minimum, provides a rate of return equal to the requirement he has set for the project. Given this, explain how you can use break-even analysis to ascertain which projects will be acceptable to him as you don't want to risk hearing him growl if you waste his time presenting him with a project that is unacceptable.