Chapter 09 Project Analysis

Multiple Choice Questions 24. What level of management is responsible for originating capital budgeting proposals A. !enior management ". #ivisional management C. $o%er management D. All levels of management 2&. 'he capital budget should be consistent %ith the firm(s) A. gro%th in sales. B. strategic plans. C. current level of funds. #. dividend policy. 2*. Which of the follo%ing %ould not be judged a traditional category of capital budgeting project A. +achine replacement proposals B. !alary adjustment proposals C. ,e% product proposals #. Plant e-pansion proposals 2.. Which of the follo%ing industry has lo% operating leverage A. !teel. ". /ailroads. C. 0lectric utilities. #. Autos.

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Chapter 09 Project Analysis

23. Which of the follo%ing capital budgeting proposals is most li4ely to display a conflict of interests A. 'he proposal %ith highest ,P5. ". 'he proposal %ith the longest paybac4 period. C. 'he proposal %ith highest 6// and 7uic4est paybac4. #. 'he proposal to solve pollution problems. 29. Which of the follo%ing is least li4ely to be responsible for a regional manager(s conflict of interest in promoting a capital budgeting proposal A. #esire for professional advancement B. 'horough 4no%ledge of the region C. 8verly optimistic economic forecasts #. 'he need for 7uic4 profitability 90. !oft capital rationing may be beneficial to a firm if it) A. reduces a firm(s interest e-pense. B. %eeds out proposals %ith %ea4er or biased ,P5s. C. allo%s managers to select their favorite projects. #. increases funds to be used for other purposes.

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Chapter 09 Project Analysis

91. 'he purpose of sensitivity analysis is to sho%) A. the optimal level of the capital budget. ". ho% price changes affect brea42even volume. C. seasonal variation in product demand. D. ho% variables in a project affect profitability. 92. !ensitivity analysis evaluates projects by) A. forecasting changes in interest rates that %ould increase financing costs. B. recording profitability changes %hile changing one variable at a time. C. insuring that the project sponsor has proper incentives. #. testing for interrelated variables. 99. What happens to the ,P5 of a one2year project if fi-ed costs are increased from :400 to :*00; the firm is profitable; has a 1&< ta- rate and employs a 12< cost of capital A. ,P5 decreases by :200.00. ". ,P5 decreases by :1.9.91. C. ,P5 decreases by :190.00. D. ,P5 decreases by :119.04.

change in cash flo% = >200? @ .0 = >190?; %hich discounts to :119.04 94. What happens to the ,P5 of a one2year project if fi-ed costs are increased from :400 to :*00; the firm is not profitable; has a 1&< ta- rate and employs a 12< cost of capital A. ,P5 decreases by :200.00. B. ,P5 decreases by :1.3.&.. C. ,P5 decreases by :190.00. #. ,P5 decreases by :119.04.

change in cash flo% = >200?; %hich discounts to :1.3.&. 9&. Which of the follo%ing appears to be a more li4ely result from using sensitivity analysis A. Agreement on the appropriate discount rate ". #etermine %hether to finance %ith debt or e7uity. C. 6solation of pivotal factor in project profitability #. !elect the best capital budgeting project.

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9*. 6f a 20< reduction in forecast sales %ould not e-tinguish a project(s profitability; then sensitivity analysis %ould suggest) A. deemphasiAing that variable as a critical factor. ". re7uiring a more detailed sales forecast. C. the initial sales forecasts %ere inflated. #. a reallocation of fi-ed costs to this product. 9.. 6f sensitivity analysis concludes that the largest impact on profits %ould come from changes in the sales level; then) A. fi-ed costs should be traded for variable costs. ". variable costs should be traded for fi-ed costs. C. the project should not be underta4en. D. additional mar4eting analysis may be beneficial before proceeding. 93. Which of the follo%ing statements is correct concerning sensitivity analysis A. 6t ignores interrelationships bet%een variables. ". !everal variables are allo%ed to change concurrently. C. 6t considers all feasible variable combinations. #. 6ts results are free from ambiguity. 99. 6f sensitivity analysis indicates none of the individual variables %ill cause a negative ,P5 under pessimistic conditions; then the) A. project is assured to be successful. ". project(s discount rate should be reduced. C. economic forecasts are possibly overly optimistic. D. interaction of the variables should be considered.

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