FIN 4001 - Chapter 11 Review Questions PDF

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FIN 4001 - Chapter 11 Review Questions...

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Ch.11 Chapter Review Questions

1) 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. 2) The key means of defending against forecasting risk is to: A) rely primarily on the net present value method of analysis. B) increase the discount rate assigned to a project. C) shorten the life of a project. D) identify sources of value within a project. E) ignore any potential salvage value that might be realized.

3) 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 4) 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 5) 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.

6) 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. 7) As the degree of sensitivity of a project to a single variable rises, the: A) less important the variable is to the final outcome of the project. B) less volatile the project's net present value is to that variable. C) greater is the importance of accurately predicting the value of that variable. D) greater is the sensitivity of the project to the other variable inputs. E) less volatile is the project's outcome. 8) 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 9) 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 noncash expenses. E) are inversely related to the number of units sold. 10) 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.

11) 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.

12) Which one of these combinations must increase the contribution margin? A) Increasing both the sales price and the variable cost per unit B) Increasing the sales quantity and increasing the variable cost per unit C) Decreasing the sales price and increasing the sales quantity D) Decreasing both fixed costs and depreciation expense E) Increasing the sales price and decreasing the variable cost per unit 13) 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

14) 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.

15) Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output? A) IRR and OCF B) Net income and contribution margin C) IRR and net income D) OCF and NPV E) Net income and NPV

16) A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. A) Sales price per unit B) Management salaries C) Variable labor costs per unit D) Initial fixed asset purchases E) Fixed costs

17) A project that has a payback period exactly equal to the project's life 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. 18) A project that has a projected IRR of negative 100 percent will also have a(n): A) discounted payback period equal to the life of the project. B) operating cash flow that is positive and equal to the depreciation. C) net present value that is negative and equal to the initial investment. D) payback period that is exactly equal to the life of the project. E) net present value that is equal to zero.

19) Which one of the following characteristics relates to the cash break-even point for a given project? A) The project never pays back. B) The discounted payback period equals the project's life. C) The NPV is equal to zero. D) The IRR equals the required rate of return. E) The OCF is equal to the depreciation expense.

20) 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. 21) 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 22) 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) degree of operating leverage at the current sales level. C) accounting break-even point. D) cash break-even point. E) financial break-even point. 23) 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

24) Assume both the discount and tax rates are positive values. At the financial break-even point, the: A) payback period equals the project's life. B) NPV is negative. C) OCF is zero. D) contribution margin per unit equals the fixed costs per unit. E) IRR equals the required return.

25) Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points? A) Accounting B) Leveraged C) Marginal D) Cash E) Financial 26) 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) OCF that is highly sensitive to the sales quantity D) High level of forecasting risk E) High depreciation expense 27) Assume a project has a sales quantity of 7,400 units, ±6 percent and a sales price of $59 a unit, ±1 percent. The expected variable cost per unit is $13, ±3 percent, and the expected fixed costs are $214,000, ±2 percent. The depreciation expense is $63,000 and the tax rate is 23 percent. What is the operating cash flow under the best-case scenario? A) $136,759 B) $118,470 C) $145,705 D) $134,208 E) $124,220

28) Your company is reviewing a project with estimated labor costs of $14.68 per unit, estimated raw material costs of $43.18 a unit, and estimated fixed costs of $18,000 a month. Sales are projected at 15,500 units, ±5 percent, over the one-year life of the project. Cost estimates are accurate within a range of ±3 percent. What are the total variable costs for the best-case scenario? A) $869,925 B) $861,560 C) $913,421 D) $951,960 E) $891,960

29) A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $842,900 per year. The tax rate is 23 percent and the required return is 11.5 percent. Suppose the projections given for price and quantity can vary by ±4 percent while variable and fixed cost estimates are accurate to within ±2 percent. What is the best-case NPV? A) $4,613 B) -$67,008 C) $127,511 D) $82,409 E) -$132,194 30) A project has expected sales of 54,000 units, ±5 percent, variable cost per unit of $87, ±2 percent, fixed costs of $287,000, ±1 percent, and a sales price per unit of $219, ±2 percent. The depreciation expense is $47,000 and the tax rate is 23 percent. What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $85? A) $132 B) $134 C) $135 D) $136 E) $133 31) At the accounting break-even point, Swiss Mountain Gear sells 22,940 ski masks at a price of $19 each. At this level of production, the depreciation is $67,000 and the variable cost per unit is $6. What is the amount of the fixed costs at this production level? A) $231,220 B) $259,400 C) $161,330 D) $187,660 E) $145,600

32) A project has an accounting break-even point of 7,264 units. The fixed costs are $164,800 and the projected variable cost per unit is $24.57. The project will require $398,000 for fixed assets which will be depreciated straight-line to zero over the project's four-year life. What is the projected sales price per unit? A) $56.59 B) $58.18 C) $64.02 D) $76.67 E) $60.95

33) A company is considering a project with a cash break-even point of 26,394 units. The selling price is $19 a unit, the variable cost per unit is $7, and depreciation is $89,800. What is the projected amount of fixed costs? A) $374,512 B) $316,728 C) $356,108 D) $288,512 E) $291,064

34) A project has an accounting break-even quantity of 28,700 units, a cash break-even quantity of 17,120 units, a life of 10 years, fixed costs of $178,000, variable costs of $18.40 per unit, and a required return of 14 percent. Depreciation is straight-line to zero over the project life. Ignoring taxes, what is the financial break-even quantity? A) 39,723 units B) 39,201 units C) 39,458 units D) 39,624 units E) 39,320 units

35) Steele Insulators is analyzing a new type of insulation for interior walls. The initial fixed asset requirement is $1.62 million, which would be depreciated straight-line to zero over the 7year life of the project. Projected fixed costs are $287,400 and the anticipated operating cash flow is $136,300. What is the degree of operating leverage for this project? A) 3.66 B) 1.92 C) 3.11 D) 2.27 E) 2.49

1)Answer: C 2)Answer: D 3)Answer: C 4)Answer: D 5)Answer: D 6)Answer: D 7)Answer: C 8)Answer: C 9)Answer: C 10)Answer: B 11)Answer: A 12)Answer: E 13)Answer: E 14)Answer: E 15)Answer: C 16)Answer: A 17)Answer: D 18)Answer: C 19)Answer: A 20)Answer: E 21)Answer: D 22)Answer: E 23)Answer: C 24)Answer: E 25)Answer: E 26)Answer: A 27)Answer: A Explanation: OCF Best case = ({[$59 (1.01) - $13 (.97)] 7,400 (1.06)} - $214,000 (.98)) (1 - .23) + $63,000 (.23) OCFBest case = $136,759 28)Answer: C Explanation: Total variable costs Best-case = [($14.68 + 43.18)(.97)(15,500)(1.05) Total variable costsBest-case = $913,421 29)Answer: E Explanation: OCF Best-case = {[$47 (1.04) - $23 (.98)] [31,000 (1.04)] - $842,900 (.98)} (1 -.23) + ($227,000/4) (.23) OCFBest-case = $30,885.39 NPV Best-case = -$227,000 + $30,885.39 {[1 - (1/1.115 4)]/.115} NPV Best-case = -$132,194

30)Answer: B Explanation: Contribution margin = $219 - 85 Contribution margin = $134 31)Answer: A Explanation: Fixed costs Accounting break-even = 22,940 ($19 - 6) - $67,000 Fixed costs Accounting break-even = $231,220 32)Answer: E Explanation: Q Accounting break-even = 7,264 = [$164,800 + ($398,000/4)]/($P - 24.57) P = $60.95 33)Answer: B Explanation: FCCash break-even = 26,394 ($19 - 7) FCCash break-even = $316,728 34)Answer: E Explanation: 17,120 = $178,000/( P - $18.40) P = $28.797 28,700 = ($178,000 + D)/($28.797 - 18.40) D = $120,399.53 Initial investment = 10 ($120,399.53) Initial investment = $1,203,995.33 $1,203,995.33 = OCF [(1 - 1/1.14 10)/.14] OCF = $230,822.21 QFinancial break-even = ($178,000 + 230,822.21)/($28.797 - 18.40) QFinancial break-even = 39,320 units

35)Answer: C Explanation: DOL = 1 + ($287,400/$136,300) DOL = 3.11...