Chap 011

Chapter 11 - Project Analysis and Evaluation
Chapter 11 Project Analysis and Evaluation

Multiple Choice Questions
1. Forecasting risk is defined as the possibility that: A. so e proposed projects !ill be rejected. ". so e proposed projects !ill be te porarily delayed. C. incorrect decisions !ill be ade due to erroneous cash flo! projections. #. so e projects !ill be utually e$clusive. E. ta$ rates could change over the life of a project.
%. &cenario analysis is defined as the: A. deter ination of the initial cash outlay re'uired to i ple ent a project. ". deter ination of changes in (P) esti ates !hen !hat-if 'uestions are posed. C. isolation of the effect that a single variable has on the (P) of a project. #. separation of a project*s sunk costs fro its opportunity costs. E. analysis of the effects that a project*s ter inal cash flo!s has on the project*s (P).
+. An analysis of the change in a project*s (P) !hen a single variable is changed is called ,,,,, analysis. A. forecasting ". scenario C. sensitivity #. si ulation E. break-even
-. An analysis !hich co bines scenario analysis !ith sensitivity analysis is called ,,,,, analysis. A. forecasting ". co bined C. co ple$ #. si ulation E. break-even
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.. )ariable costs can be defined as the costs that: A. re ain constant for all ti e periods. ". re ain constant over the short run. C. vary directly !ith sales. #. are classified as non-cash e$penses. E. are inversely related to the nu ber of units sold.
/. Fi$ed costs: A. change as a s all 'uantity of output produced changes. ". are constant over the short-run regardless of the 'uantity of output produced. C. are defined as the change in total costs !hen one ore unit of output is produced. #. are subtracted fro sales to co pute the contribution argin. E. can be ignored in scenario analysis since they are constant over the life of a project.
0. 1he change in revenue that occurs !hen one A. arginal revenue. ". average revenue. C. total revenue. #. erosion. E. scenario revenue.
ore unit of output is sold is referred to as:
2. 1he change in variable costs that occurs !hen production is increased by one unit is referred to as the: A. arginal cost. ". average cost. C. total cost. #. scenario cost. E. net cost.
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3. "y definition4 !hich one of the follo!ing point6 A. net present value ". internal rate of return C. contribution argin #. net inco e E. operating cash flo!
ust e'ual 5ero at the accounting break-even
17. "y definition4 !hich one of the follo!ing A. net present value ". internal rate of return C. contribution argin #. net inco e E. operating cash flo!
ust e'ual 5ero at the cash break-even point6
11. 8hich one of the follo!ing is defined as the sales level that corresponds to a 5ero (P)6 A. accounting break-even ". leveraged break-even C. arginal break-even #. cash break-even E. financial break-even
1%. 9perating leverage is the degree of dependence a fir A. variable costs. ". fi$ed costs. C. sales. #. operating cash flo!s. E. net !orking capital.
places on its:
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1+. 8hich one of the follo!ing is the relationship bet!een the percentage change in operating cash flo! and the percentage change in 'uantity sold6 A. degree of sensitivity ". degree of operating leverage C. accounting break-even #. cash break-even E. contribution argin
1-. "ell 8eather :oods has several proposed independent projects that have positive (P)s. ;o!ever4 the fir cannot initiate any of the projects due to a lack of financing. 1his situation is referred to as: A. financial rejection. ". project rejection. C. soft rationing. #. arginal rationing. E. capital rationing.
1.. 1he procedure of allocating a fi$ed a ount of funds for capital spending to each business unit is called: A. arginal spending. ". capital preservation. C. soft rationing. #. hard rationing. E. arginal rationing.
1/. PC Enterprises !ants to co ence a ne! project but is unable to obtain the financing under any circu stances. 1his fir is facing: A. financial deferral. ". financial allocation. C. capital allocation. #. arginal rationing. E. hard rationing.
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10. Forecasting risk e phasi5es the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. ethod of analysis used to ake the decision. ". initial cash outflo!. C. ability to recoup any invest ent in net !orking capital. #. accuracy of the projected cash flo!s. E. length of the project.
12. &teve is fairly cautious !hen analy5ing a ne! project and thus he projects the ost opti istic4 the ost realistic4 and the ost pessi istic outco e that can reasonably be e$pected. 8hich type of analysis is &teve using6 A. si ulation testing ". sensitivity analysis C. break-even analysis #. rationing analysis E. scenario analysis
13. &cenario analysis is best suited to acco plishing !hich one of the follo!ing !hen analy5ing a project6 A. deter ining ho! fi$ed costs affect (P) ". esti ating the residual value of fi$ed assets C. identifying the potential range of reasonable outco es #. deter ining the ini al level of sales re'uired to break-even on an accounting basis E. deter ining the ini al level of sales re'uired to break-even on a financial basis
%7. 8hich one of the follo!ing !ill be used in the co putation of the best-case analysis of a proposed project6 A. ini al nu ber of units that are e$pected to be produced and sold ". the lo!est e$pected salvage value that can be obtained for a project*s fi$ed assets C. the ost anticipated sales price per unit #. the lo!est variable cost per unit that can reasonably be e$pected E. the highest level of fi$ed costs that is actually anticipated
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%1. 1he base case values used in scenario analysis are the ones considered the A. opti istic. ". desired by anage ent. C. pessi istic. #. conducive to creating a positive net present value. E. likely to occur.
ost:
%%. 8hich of the follo!ing variables !ill be at their highest e$pected level under a !orst case scenario6 <. fi$ed cost <<. sales price <<<. variable cost <). sales 'uantity A. < only ". <<< only C. << and <<< only #. < and <<< only E. <4 <<<4 and <) only
%+. 8hen you assign the lo!est anticipated sales price and the highest anticipated costs to a project4 you are analy5ing the project under the condition kno!n as: A. best case sensitivity analysis. ". !orst case sensitivity analysis. C. best case scenario analysis. #. !orst case scenario analysis. E. base case scenario analysis.
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%-. 8hich one of the follo!ing state ents concerning scenario analysis is correct6 A. 1he pessi istic case scenario deter ines the a$i u loss4 in current dollars4 that a fir could possibly incur fro a given project. ". &cenario analysis defines the entire range of results that could be reali5ed fro a proposed invest ent project. C. &cenario analysis deter ines !hich variable has the greatest i pact on a project*s final outco e. #. &cenario analysis helps anagers analy5e various outco es that are possible given reasonable ranges for each of the assu ptions. E. =anage ent is guaranteed a positive outco e for a project !hen the !orst case scenario produces a positive (P).
%.. &ensitivity analysis deter ines the: A. range of possible outco es given that ost variables are reliable only !ithin a stated range. ". degree to !hich the net present value reacts to changes in a single variable. C. net present value range that can be reali5ed fro a proposed project. #. degree to !hich a project relies on its fi$ed costs. E. ideal ratio of variable costs to fi$ed costs for profit a$i i5ation.
%/. Assu e you graph a project*s net present value given various sales 'uantities. 8hich one of the follo!ing is correct regarding the resulting function6 A. 1he steepness of the function relates to the project*s degree of operating leverage. ". 1he steeper the function4 the less sensitive the project is to changes in the sales 'uantity. C. 1he resulting function !ill be a hyperbole. #. 1he resulting function !ill include only positive values. E. 1he slope of the function easures the sensitivity of the net present value to a change in sales 'uantity.
%0. As the degree of sensitivity of a project to a single variable rises4 the: A. less i portant the variable to the final outco e of the project. ". less volatile the project*s net present value to that variable. C. greater the i portance of accurately predicting the value of that variable. #. greater the sensitivity of the project to the other variable inputs. E. less volatile the project*s outco e.
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%2. &ensitivity analysis is based on: A. varying a single variable and easuring the resulting change in the (P) of a project. ". applying differing discount rates to a project*s cash flo!s and easuring the effect on the (P). C. e$panding and contracting the nu ber of years for a project to deter ine the opti al project length. #. the best4 !orst4 and ost e$pected situations. E. various states of the econo y and the probability of each state occurring.
%3. 8hich type of analysis identifies the variable4 or variables4 that are success of a particular project6 A. leverage ". risk C. break-even #. sensitivity E. cash flo!
ost critical to the
+7. &i ulation analysis is based on assigning a ,,,,, and analy5ing the results. A. narro! range of values to a single variable ". narro! range of values to ultiple variables si ultaneously C. !ide range of values to a single variable #. !ide range of values to ultiple variables si ultaneously E. single value to each of the variables
+1. 8hich one of the follo!ing types of analysis is the A. scenario ". break-even C. sensitivity #. degree of operating leverage E. si ulation
ost co ple$ to conduct6
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+%. 1ed is analy5ing a project using si ulation. ;is focus is li ited to the short-ter . 1o ease the si ulation process4 he is co bining e$penses into various categories. 8hich one of the follo!ing should he include in the fi$ed cost category6 A. production depart ent payroll ta$es ". e'uip ent insurance C. sales ta$ #. ra! aterials E. product shipping costs
++. 8hich one of the follo!ing state ents concerning variable costs is correct6 A. )ariable costs inus fi$ed costs e'ual arginal costs. ". )ariable costs are e'ual to fi$ed costs !hen production is e'ual to 5ero. C. An increase in variable costs increases the operating cash flo!. #. )ariable costs are inversely related to fi$ed costs. E. )ariable costs per unit are inversely related to the contribution argin per unit.
+-. 8hich of the follo!ing are inversely related to variable costs per unit6 <. contribution argin per unit <<. nu ber of units sold <<<. operating cash flo! per unit <). net profit per unit A. < and << only ". <<< and <) only C. <<4 <<<4 and <) only #. <4 <<<4 and <) only E. <4 <<4 <<<4 and <)
+.. &teve4 the sales anager for 1> Products4 !ants to sponsor a one-!eek ?Custo er Appreciation &ale? !here the fir offers to sell additional units of a product at the lo!est price possible !ithout negatively affecting the fir *s profits. 8hich one of the follo!ing represents the price that should be charged for the additional units during this sale6 A. average variable cost ". average total cost C. average total revenue #. arginal revenue E. arginal cost
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+/. 1he president of :lobal 8holesalers !ould like to offer special sale prices to the fir *s best custo ers under the follo!ing ter s: 1. 1he prices !ill apply only to units purchased in e$cess of the 'uantity nor ally purchased by a custo er. %. 1he units purchased ust be paid for in cash at the ti e of sale. +. 1he total 'uantity sold under these ter s cannot e$ceed the e$cess capacity of the fir . -. 1he net profit of the fir should not be affected. .. 1he prices !ill be in effect for one !eek only. :iven these conditions4 the special sale price should be set e'ual to the: A. average variable cost of aterials only. ". average cost of all variable inputs. C. sensitivity value of the variable costs. #. arginal cost of aterials only. E. arginal cost of all variable inputs.
+0. 1he contribution argin per unit is e'ual to the: A. sales price per unit inus the total costs per unit. ". variable cost per unit inus the fi$ed cost per unit. C. sales price per unit inus the variable cost per unit. #. pre-ta$ profit per unit. E. afterta$ profit per unit.
+2. 8hich of the follo!ing values !ill be e'ual to 5ero !hen a fir accounting break-even level of output6 <. operating cash flo! <<. internal rate of return <<<. net inco e <). payback period A. < only ". <<< only C. << and <<< only #. < and <) only E. <4 <<4 and <<< only
is producing the
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+3. An increase in !hich of the follo!ing !ill increase the accounting break-even 'uantity6 Assu e straight-line depreciation is used. <. annual salary for the fir *s president <<. contribution argin per unit <<<. cost of e'uip ent re'uired by a project <). variable cost per unit A. < and <<< only ". < and <) only C. << and <<< only #. <4 <<<4 and <) only E. <4 <<4 and <) only
-7. 8ebster <ron 8orks started a ne! project last year. As it turns out4 the project has been operating at its accounting break-even level of output and is no! e$pected to continue at that level over its lifeti e. :iven this4 you kno! that the project: A. !ill never pay back. ". has a 5ero net present value. C. is operating at a higher level than if it !ere operating at its cash break-even level. #. is operating at a higher level than if it !ere operating at its financial break-even level. E. is lo!ering the total net inco e of the fir .
-1. :iven the follo!ing4 !hich feature identifies the ost desirable level of output for a project6 A. operating cash flo! e'ual to the depreciation e$pense ". payback period e'ual to the project*s life C. discounted payback period e'ual to the project*s life #. 5ero <@@ E. 5ero operating cash flo!
-%. At the accounting break-even point4 the: A. payback period ust e'ual the re'uired payback period. ". (P) is 5ero. C. <@@ is 5ero. #. contribution argin per unit e'uals the fi$ed costs per unit. E. contribution argin per unit is 5ero.
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-+. A project has a payback period that e$actly e'uals the project*s life. 1he project is operating at: A. its a$i u capacity. ". the financial break-even point. C. the cash break-even point. #. the accounting break-even point. E. a 5ero level of output.
--. )alerie just co pleted analy5ing a project. ;er analysis indicates that the project !ill have a /-year life and re'uire an initial cash outlay of A+%74777. Annual sales are esti ated at A.234777 and the ta$ rate is +- percent. 1he net present value is a negative A+%74777. "ased on this analysis4 the project is e$pected to operate at the: A. a$i u possible level of production. ". ini u possible level of production. C. financial break-even point. #. accounting break-even point. E. cash break-even point.
-.. A project has a projected <@@ of negative 177 percent. 8hich one of the follo!ing state ents ust also be true concerning this project6 A. 1he discounted payback period e'uals the life of the project. ". 1he operating cash flo! is positive and e'ual to the depreciation. C. 1he net present value of the project is negative and e'ual to the initial invest ent. #. 1he payback period is e$actly e'ual to the life of the project. E. 1he net present value of the project is e'ual to 5ero.
-/. 8hich of the follo!ing characteristics relate to the cash break-even point for a given project6 <. 1he project never pays back. <<. 1he <@@ e'uals the re'uired rate of return. <<<. 1he (P) is negative and e'ual to the initial cash outlay. <). 1he operating cash flo! is e'ual to the depreciation e$pense. A. < and <<< only ". << and <) only C. <4 <<4 and <<< only #. <<4 <<<4 and <) only E. <4 <<4 <<<4 and <)
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-0. 8hen the operating cash flo! of a project is e'ual to 5ero4 the project is operating at the: A. a$i u possible level of production. ". ini u possible level of production. C. financial break-even point. #. accounting break-even point. E. cash break-even point.
-2. 8hich one of the follo!ing represents the level of output !here a project produces a rate of return just e'ual to its re'uire ent6 A. capital break-even ". cash break-even C. accounting break-even #. financial break-even E. internal break-even
-3. 8hich of the follo!ing state ents are identified !ith financial break-even point6 <. 1he present value of the cash inflo!s e$actly offsets the initial cash outflo!. <<. 1he payback period is e'ual to the life of the project. <<<. 1he (P) is 5ero. <). 1he discounted payback period e'uals the life of the project. A. < and << only ". < and <<< only C. << and <) only #. <4 <<4 and <<< only E. <4 <<<4 and <) only
.7. Bou !ould like to kno! the ini u level of sales that is needed for a project to be accepted based on its net present value. 1o deter ine that sales level you should co pute the: A. contribution argin per unit and set that argin e'ual to the fi$ed costs per unit. ". contribution argin per unit. C. accounting break-even point. #. cash break-even point. E. financial break-even point.
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.1. 1heresa is analy5ing a project that currently has a projected (P) of 5ero. 8hich of the follo!ing changes that she is considering !ill help that project produce a positive (P) instead6 Consider each change independently. <. increase the 'uantity sold <<. decrease the fi$ed leasing cost for e'uip ent <<<. decrease the labor hours needed to produce one unit <). increase the sales price A. < and << only ". < and <) only C. <<4 <<<4 and <) only #. <4 <<4 and <) only E. <4 <<4 <<<4 and <)
.%. Bou are considering a project that you believe is 'uite risky. 1o reduce any potentially har ful results fro accepting this project4 you could: A. lo!er the degree of operating leverage. ". lo!er the contribution argin per unit. C. increase the initial cash outlay. #. increase the fi$ed costs per unit !hile lo!ering the contribution argin per unit. E. lo!er the operating cash flo! of the project.
.+. 8hich one of the follo!ing characteristics best describes a project that has a lo! degree of operating leverage6 A. high variable costs relative to the fi$ed costs ". relatively high initial cash outlay C. an 9CF that is highly sensitive to the sales 'uantity #. high level of forecasting risk E. a high depreciation e$pense
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.-. 8hich one of the follo!ing !ill best reduce the risk of a project by lo!ering the degree of operating leverage6 A. hiring te porary !orkers fro an e ploy ent agency rather than hiring part-ti e production e ployees ". subcontracting portions of the project rather than purchasing ne! e'uip ent to do all the !ork in-house C. leasing e'uip ent on a long-ter basis rather than buying e'uip ent #. lo!ering the projected selling price per unit E. changing the proposed labor-intensive production ethod to a ore capital intensive ethod
... 1he degree of operating leverage is e'ual to: A. the percentage change in 'uantity divided by the percentage change in 9CF. ". the percentage change in sales divided by the percentage change in 9CF. C. 1 C FCD9CF. #. 1 C )CD9CF. E. 1 - EFC C )CFD9CF.
./. Gpto!n Pro otions has three divisions. As part of the planning process4 the CF9 re'uested that each division sub it its capital budgeting proposals for ne$t year. 1hese proposals represent positive net present value projects that fall !ithin the long-range plans of the fir . 1he re'uests fro the divisions are A-.% illion4 A+.1 illion4 and A/.2 illion4 respectively. For the fir as a !hole4 Gpto!n Pro otions is li ited to spending A17 illion for ne! projects ne$t year. 1his is an e$a ple of: A. scenario analysis. ". sensitivity analysis. C. deter ining operating leverage. #. soft rationing. E. hard rationing.
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.0. "rubaker H :oss has received re'uests for capital invest ent funds for ne$t year fro each of its five divisions. All re'uests represent positive net present value projects. All projects are independent. &enior anage ent has decided to allocate the available funds based on the profitability inde$ of each project since the co pany has insufficient funds to fulfill all of the re'uests. =anage ent is follo!ing a practice kno!n as: A. scenario analysis. ". sensitivity analysis. C. leveraging. #. hard rationing. E. soft rationing.
.2. 1he CF9 of Ed!ard*s Food #istributors is continually receiving capital funding re'uests fro its division anagers. 1hese re'uests are seeking funding for positive net present value projects. 1he CF9 continues to deny all funding re'uests due to the financial situation of the co pany. Apparently4 the co pany is: A. operating at the accounting break-even point. ". operating at the financial break-even point. C. facing hard rationing. #. operating !ith 5ero leverage. E. operating at a$i u capacity.
.3. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 plus or inus % percent. 8hat is the sales revenue under the !orst case scenario6 A. A14/2/42%. ". A14-3/4%.7 C. A14-//4+%. #. A14.-+4.77 E. A14/%74/0.
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/7. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 give or take % percent. 8hat is the contribution argin per unit under the best case scenario6 A. A%73..% ". A-3-./7 C. A-/3..% #. A-37.77 E. A.1..-7
/1. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 give or take % percent. 8hat is the a ount of the total costs per unit under the !orst case scenario6 A. A.-2..2 ". A.00.-. C. A/7-.1/ #. A/+2.%+ E. A/-7.%.
/%. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 give or take % percent. 1he ta$ rate is +. percent. 1he co pany is conducting a sensitivity analysis on the sales price using a sales price esti ate of A0... 8hat is the operating cash flo! based on this analysis6 A. A++0430. ". A%3+4723 C. A2/4/0. #. A+.-420E. A+/2471.
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/+. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 give or take % percent. 1he ta$ rate is +. percent. 1he co pany is conducting a sensitivity analysis !ith fi$ed costs of A.374777. 8hat is the 9CF given this analysis6 A. A++0430. ". A%2.4+.7 C. A++74.77 #. A+.-420E. A-1-4+.7
/-. =iller =fg. is analy5ing a proposed project. 1he co pany e$pects to sell 24777 units4 plus or inus % percent. 1he e$pected variable cost per unit is A11 and the e$pected fi$ed costs are A%204777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus . percent range. 1he depreciation e$pense is A/24777. 1he ta$ rate is +% percent. 1he sales price is esti ated at A/- a unit4 plus or inus + percent. 8hat is the earnings before interest and ta$es under the base case scenario6 A. A-/43%7 ". A3+41/7 C. A11-43%7 #. A/34777 E. A.24-27
/.. =iller =fg. is analy5ing a proposed project. 1he co pany e$pects to sell 24777 units4 plus or inus % percent. 1he e$pected variable cost per unit is A11 and the e$pected fi$ed costs are A%204777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus . percent range. 1he depreciation e$pense is A/24777. 1he ta$ rate is +% percent. 1he sales price is esti ated at A/- a unit4 give or take + percent. 8hat is the operating cash flo! under the best case scenario6 A. A1--41.7 ". A1-24-0. C. A17041-/ #. A1/24/+7 E. A10-4%%7
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//. =iller =fg. is analy5ing a proposed project. 1he co pany e$pects to sell 24777 units4 plus or inus % percent. 1he e$pected variable cost per unit is A11 and the e$pected fi$ed costs are A%204777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus . percent range. 1he depreciation e$pense is A/24777. 1he ta$ rate is +% percent. 1he sales price is esti ated at A/- a unit4 give or take + percent. 8hat is the net inco e under the !orst case scenario6 A. A24.02 ". A124%%2 C. A1.42-/ #. A%7407E. A%-4/3/
/0. &tellar Plastics is analy5ing a proposed project. 1he co pany e$pects to sell 1%4777 units4 plus or inus + percent. 1he e$pected variable cost per unit is A+.%7 and the e$pected fi$ed costs are A+74777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus . percent range. 1he depreciation e$pense is A%/4777. 1he ta$ rate is +- percent. 1he sales price is esti ated at A0..7 a unit4 plus or inus - percent. 8hat is the operating cash flo! for a sensitivity analysis using total fi$ed costs of A+147776 A. A134.27 ". A%%4-+/ C. A%04%17 #. A+14-/7 E. A+04.-7
/2. &unset Gnited is analy5ing a proposed project. 1he co pany e$pects to sell 1.4777 units4 plus or inus - percent. 1he e$pected variable cost per unit is A1%7 and the e$pected fi$ed costs are A+114777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus + percent range. 1he depreciation e$pense is A0-4777. 1he ta$ rate is +. percent. 1he sales price is esti ated at A107 a unit4 plus or inus % percent. 8hat is the contribution argin per unit for a sensitivity analysis using a variable cost per unit of A1%.6 A. A+7 ". A-. C. A.7 #. A%E. A%0
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/3. Bour co pany is revie!ing a project !ith esti ated labor costs of A%1.%7 per unit4 esti ated ra! aterial costs of A+0.12 a unit4 and esti ated fi$ed costs of A%74777 a onth. &ales are projected at -%4777 units over the one-year life of the project. All esti ates are accurate !ithin a range of plus or inus . percent. 8hat are the total variable costs for the !orst-case scenario6 A. A2374-77 ". A14./14./7 C. A%4--.42+7 #. A%4-.143/7 E. A%4/3143/7
07. A project has earnings before interest and ta$es of A1-4/774 fi$ed costs of A.%47774 a selling price of A%3 a unit4 and a sales 'uantity of 1/4777 units. All esti ates are accurate !ithin a plusD inus range of + percent. #epreciation is A1%4777. 8hat is the base case variable cost per unit6 A. A%%.1/ ". A%+.2C. A%-.73 #. A%-.%+ E. A%..12
01. At a production level of -4.77 units4 a project has total costs of A1724777. 1he variable cost per unit is A11.%7. Assu e the fir can increase production by 14777 units !ithout increasing its fi$ed costs. 8hat !ill the total costs be if -4277 units are produced6 A. A17%4027 ". A17-4/-7 C. A17/4-77 #. A1724777 E. A1114+/7
11-%7
0%. A co pany is considering a project !ith a cash break-even point of %%4/77 units. 1he selling price is A%2 a unit4 the variable cost per unit is A1+4 and depreciation is A1-4777. 8hat is the projected a ount of fi$ed costs6 A. A+%.4777 ". A++34777 C. A+-%4777 #. A+-24777 E. A+.+4777
0+. At the accounting break-even point4 &!iss =ountain :ear sells 1-4/77 ski asks at a price of A17 each. At this level of production4 the depreciation is A.24777 and the variable cost per unit is A-. 8hat is the a ount of the fi$ed costs at this production level6 A. A%34/77 ". A.%4-77 C. A/14+77 #. A204/77 E. A1-.4/77
0-. 1he Coffee E$press has co puted its fi$ed costs to be A7.+- for every cup of coffee it sells given annual sales of %1%4777 cups. 1he sales price is A1.-3 per cup !hile the variable cost per cup is A7./+. ;o! any cups of coffee ust it sell to break-even on a cash basis6 A. 2+421". 3/4-07 C. 1%+4317 #. 1/04/+7 E. %1%4777
11-%1
0.. 1he =etal &hop produces 1.2 illion etal fasteners a year for industrial use. At this level of production4 its total fi$ed costs are A+024777 and its total costs are A.%%4777. 1he fir can increase its production by . percent4 !ithout increasing either its total fi$ed costs or its variable costs per unit. A custo er has ade a one-ti e offer for an additional .74777 units at a price per unit of A7.17. &hould the fir sell the additional units at the offered price6 8hy or !hy not6 A. yesI 1he offered price is less than the arginal cost. ". yesI 1he offered price is e'ual to the arginal cost. C. yesI 1he offered price is greater than the arginal cost. #. noI 1he offered price is less than the arginal cost. E. noI 1he offered price is greater than the arginal cost.
0/. 8e$ford <ndustrial &upply is considering a ne! project !ith esti ated depreciation of A%/47774 fi$ed costs of A0347774 and total sales of A1204777. 1he variable costs per unit are esti ated at A11.27. 8hat is the accounting break-even level of production6 A. -4201 units ". .4+++ units C. .4-1. units #. /43-3 units E. 04%-2 units
00. 1he accounting break-even production 'uantity for a project is 114/-7 units. 1he fi$ed costs are A%1/4777 and the contribution argin per unit is A%2. 1he fi$ed assets re'uired for the project !ill be depreciated on straight-line basis to 5ero over the project*s .-year life. 8hat is the a ount of fi$ed assets re'uired for this project6 A. A+%.43%7 ". A.-34/77 C. A0-24.77 #. A147274777 E. A14/%34/77
11-%%
02. A project has an accounting break-even point of 1.4+%3 units. 1he fi$ed costs are A+2%4777 and the projected variable cost per unit is A%3.17. 1he project !ill re'uire A0274777 for fi$ed assets !hich !ill be depreciated straight-line to 5ero over the project*s /-year life. 8hat is the projected sales price per unit6 A. A-0./. ". A-2.12 C. A.-.7% #. A././0 E. A/%..7
03. A proposed project has fi$ed costs of A342774 depreciation e$pense of A%40774 and a sales 'uantity of %4177 units. 1he total variable costs are A.4/70. 8hat is the contribution argin per unit if the projected level of sales is the accounting break-even point6 A. A+.%2 ". A-.70 C. A..3. #. A/.1/ E. A0.11
27. &pencer 1ools !ould like to offer a special product to its best custo ers. ;o!ever4 the fir !ants to li it its a$i u potential loss on this product to the fir *s initial invest ent in the project. 1he fi$ed costs are esti ated at A%147774 the depreciation e$pense is A1147774 and the contribution argin per unit is A1%..7. 8hat is the ini u nu ber of units the fir should pre-sell to ensure its potential loss does not e$ceed the desired level6 A. 14%%7 units ". 14/27 units C. %4%1. units #. %4./7 units E. %40.7 units
11-%+
21. 1he =otor 8orks is considering an e$pansion project !ith esti ated annual fi$ed costs of A0147774 depreciation of A+24.774 variable costs per unit of A10.37 and an esti ated sales price of A%2 per unit. ;o! any units ust the fir sell to break-even on a cash basis6 A. /4.%1 units ". 047+7 units C. 04.17 units #. 34//0 units E. 1742-% units
2%. A proposed project has a contribution argin per unit of A1+.174 fi$ed costs of A0-47774 depreciation of A1%4.774 variable costs per unit of A%%4 and a financial break-even point of 114+/7 units. 8hat is the operating cash flo! at this level of output6 A. A7 ". A1%4.77 C. A/%4+73 #. A0-421/ E. A2/4.77
2+. Cantor*s has been busy analy5ing a ne! product. 1hus far4 anage ent has deter ined that an 9CF of A%124%77 !ill result in a 5ero net present value for the project4 !hich is the ini u re'uire ent for project acceptance. 1he fi$ed costs are A+%34777 and the contribution argin per unit is A%1/.-7. 1he co pany feels that it can realistically capture %.. percent of the 1174777 unit arket for this product. 1he ta$ rate is +- percent and the re'uired rate of return is 11 percent. &hould the co pany develop the ne! product6 8hy or !hy not6 A. BesI 1he project*s e$pected <@@ e$ceeds the re'uired rate of return. ". BesI 1he e$pected level of sales e$ceeds the re'uired level of production. C. (oI 1he re'uired level of production e$ceeds the e$pected level of sales. #. (oI 1he <@@ is less than the re'uired rate of return. E. (oI 1he project !ill never payback on a discounted basis.
11-%-
2-. 1ucker*s 1rucking is considering a project !ith a discounted payback period just e'ual to the project*s life. 1he projections include a sales price of A+24 variable cost per unit of A12..74 and fi$ed costs of A+%4777. 1he operating cash flo! is A134077. 8hat is the break-even 'uantity6 A. /+1 units ". 14%11 units C. 14/-1 units #. %4+71 units E. %4/.1 units
2.. Bou are in charge of a project that has a degree of operating leverage of %./-. 8hat !ill happen to the operating cash flo!s if the nu ber of units you sell increase by / percent6 A. 1..2- percent decrease ". %.%0 percent decrease C. no change #. %.%0 percent increase E. 1..2- percent increase
2/. 1he accounting anager of :ate!ay <nns has noted that every ti e the inn*s average occupancy rate increases by % percent4 the operating cash flo! increases by ..+ percent. 8hat is the degree of operating leverage if the contribution argin per unit is A-06 A. 7.+2 ". 7..0 C. 1.0. #. %.17 E. %./.
11-%.
20. &teele <nsulators is analy5ing a ne! type of insulation for interior !alls. =anage ent has co piled the follo!ing infor ation to deter ine !hether or not this ne! insulation should be anufactured. 1he insulation project has an initial fi$ed asset re'uire ent of A1.+ illion4 !hich !ould be depreciated straight-line to 5ero over the 1%-year life of the project. Projected fi$ed costs are A0-%4777 and the anticipated annual operating cash flo! is A%-14777. 8hat is the degree of operating leverage for this project6 A. +.02 ". +.3% C. -.72 #. -.%0 E. -..+
22. Bou are the anager of a project that has a %.2 degree of operating leverage and a re'uired return of 1- percent. #ue to the current state of the econo y4 you e$pect sales to decrease by 0 percent ne$t year. 8hat change should you e$pect in the operating cash flo!s ne$t year given your sales prediction6 A. 13./7 percent decrease ". 1/.7+ percent decrease C. 1+.-/ percent decrease #. ../7 percent decrease E. %.0- percent decrease
Essay Questions
23. 8hat is operating leverage and !hy is it i portant in the analysis of capital e$penditure projects6
11-%/
37. 8hat is forecasting risk and !hy is it i portant to the analysis of capital e$penditure projects6 8hat ethods can be used to reduce this risk6
31. 8hat are the key features of the accounting4 cash4 and financial break-even points6
3%. Assu e that a country e$periences a financial crisis that causes the nation*s financial arkets to free5e in a anner that prevents a private fir fro raising capital fro any source. E$plain ho! project analysis conducted by that fir !ould !ork in this situation.
3+. =r. "ear4 your boss4 !ill only agree to accept a project that4 as a ini u 4 provides a rate of return e'ual to the re'uire ent he has set for the project. :iven this4 e$plain ho! you can use break-even analysis to ascertain !hich projects !ill be acceptable to hi as you don*t !ant to risk hearing hi gro!l if you !aste his ti e presenting hi !ith a project that is unacceptable.
11-%0
3-. Cool &hades4 <nc. EC&<F anufactures biotech sunglasses. 1he variable aterials cost is A1./3 per unit4 and the variable labor cost is A+.7- per unit. &uppose the fir incurs fi$ed costs of A0.74777 during a year in !hich total production is -.74777 units and the selling price is A11..7 per unit. 8hat is the cash break-even point6 A. 0/4-.+ units ". 224/.% units C. 117402+ units #. 1%24370 units E. 1-740/2 units
3.. =ountain :ear can anufacture ountain cli bing shoes for A1-.3. per pair in variable ra! aterial costs and A12.-/ per paid in variable labor costs. 1he shoes sell for A1%0 per pair. >ast year4 production !as 1074777 pairs and fi$ed costs !ere A2+74777. 8hat is the ini u acceptable total revenue the co pany should accept for a one-ti e order for an e$tra 174777 pairs6 A. A1-34.77 ". A%204/77 C. A++-4177 #. A+274%11 E. A141/-4177
3/. 8e are evaluating a project that costs A2.-47774 has a 1.-year life4 and has no salvage value. Assu e that depreciation is straight-line to 5ero over the life of the project. &ales are projected at 1.-4777 units per year. Price per unit is A-14 variable cost per unit is A%74 and fi$ed costs are A2/.417% per year. 1he ta$ rate is ++ percent4 and !e re'uire a 1- percent return on this project. &uppose the projections given for price4 'uantity4 variable costs4 and fi$ed costs are all accurate to !ithin 1- percent. 8hat is the !orst-case (P)6 A. A32-4/1+ ". A14%/04772 C. A14-234.11 #. A1402%4-73 E. A1433+4207
11-%2
30. A project has a unit price of A.47774 a variable cost per unit of A-47774 fi$ed costs of A10477747774 and depreciation e$pense of A/43074777. 8hat is the accounting break-even 'uantity6 A. /4307 units ". 1747+7 units C. 104777 units #. %14-07 units E. %+4307 units
32. A project has the follo!ing esti ated data: price J A0- per unitI variable costs J A+3.%% per unitI fi$ed costs J A/4.77I re'uired return J 2 percentI initial invest ent J A24777I life J years. <gnore the effect of ta$es. 8hat is the degree of operating leverage at the financial break-even level of output6 A. %.01/ ". +./31 C. -..%2 #. /.77+ E. 0.++0
33. Consider a project !ith the follo!ing data: accounting break-even 'uantity J %34777 unitsI cash break-even 'uantity J 1.43.7 unitsI life J 17 yearsI fi$ed costs J A%7+4777I variable costs J A%- per unitI re'uired return J 1- percentI depreciation J straight line. <gnoring the effect of ta$es4 !hat is the financial break-even 'uantity6 A. +240%+ units ". +34%71 units C. +34-.2 units #. +34/%- units E. -743/3 units
177. At an output level of .74777 units4 you calculate that the degree of operating leverage is 1.2. 8hat !ill be the percentage change in operating cash flo! if the ne! output level is .-4.77 units6 A. ..77 percent ". /.10 percent C. 1/.%7 percent #. 10.-+ percent E. %7.77 percent
11-%3
171. A proposed project has fi$ed costs of A+/4777 per year. 1he operating cash flo! at 124777 units is A/04777. 8hat !ill be the ne! degree of operating leverage if the nu ber of units sold rises to 124.776 A. 1.-/ ". 1..% C. 1./0 #. %.72 E. %.1-
17%. Consider a /-year project !ith the follo!ing infor ation: initial fi$ed asset invest ent J A-/74777I straight-line depreciation to 5ero over the /-year lifeI 5ero salvage valueI price J A+-I variable costs J A13I fi$ed costs J A1224/77I 'uantity sold J 374.%2 unitsI ta$ rate J +% percent. 8hat is the sensitivity of 9CF to changes in 'uantity sold6 A. A17.%7 per unit ". A11.1/ per unit C. A11.+2 per unit #. A1%.++ per unit E. A1%..- per unit
17+. Bou are considering a ne! product launch. 1he project !ill cost A/+747774 have a .-year life4 and have no salvage valueI depreciation is straight-line to 5ero. &ales are projected at 1/7 units per year4 price per unit !ill be A%-47774 variable cost per unit !ill be A1%47774 and fi$ed costs !ill be A%2+4777 per year. 1he re'uired return is 11 percent and the relevant ta$ rate is +- percent. "ased on your e$perience4 you think the unit sales4 variable cost4 and fi$ed cost projections given here are probably accurate to !ithin 3 percent. 8hat is the !orst case (P)6 A. A+4-104370 ". A%4/.-4%-1 C. A2224/12 #. A+417%41+E. A+4-.247%7
11-+7
17-. =c:illa :olf has decided to sell a ne! line of golf clubs. 1he clubs !ill sell for A.77 per set and have a variable cost of A%77 per set. 1he co pany spent A11+4777 for a arketing study that deter ined the co pany !ill sell .24777 sets per year for 0 years. 1he arketing study also deter ined that the co pany !ill lose sales of 1.4777 sets of its high-priced clubs. 1he high-priced clubs sell at A077 and have variable costs of A+77. 1he co pany !ill also increase sales of its cheap clubs by 34777 sets. 1he cheap clubs sell for A%77 and have variable costs of A177 per set. 1he fi$ed costs each year !ill be A04..34777. 1he co pany has also spent A141++4777 on research and develop ent for the ne! clubs. 1he plant and e'uip ent re'uired !ill cost A%147774777 and !ill be depreciated on a straight-line basis. 1he ne! clubs !ill also re'uire an increase in net !orking capital of A147.+4777 that !ill be returned at the end of the project. 1he ta$ rate is -7 percent4 and the cost of capital is 2 percent. 8hat is the <@@6 A. 0..1 percent ". 0.2% percent C. 2.1+ percent #. 2.-3 percent E. 2./% percent
17.. ;ybrid cars are touted as a ?green? alternativeI ho!ever4 the financial aspects of hybrid o!nership are not as clear. Consider a hybrid odel that has a list price of A.4-%7 Eincluding ta$ conse'uencesF ore than a co parable car !ith a traditional gasoline engine. Additionally4 the annual o!nership costs Eother than fuelF for the hybrid !ere e$pected to be A-%7 ore than the traditional odel. 1he EPA ileage esti ate is %+ pg for the traditional odel and %. pg for the hybrid odel. Assu e the appropriate interest rate is 17 percent4 all cash flo!s occur at the end of the year4 you drive 1.4377 iles per year4 and keep either car for / years. 8hat price per gallon !ould ake the decision to buy they hybrid !orth!hile6 A. A12.03 ". A%1.-2 C. A%0.13 #. A%2.+% E. A+7.17
11-+1
17/. <n an effort to capture the large jet arket4 ;iro Airplanes invested A1%./2 billion developing its "-374 !hich is capable of carrying 277 passengers. 1he plane has a list price of A%0. illion. <n discussing the plane4 ;iro Airplanes stated that the co pany !ould breakeven !hen %-/ "-37s !ere sold. Assu e the break-even sales figure given is the cash flo! break-even. &uppose the sales of the "-37 last for only 3 years. ;o! any airplanes ust ;iro Airplanes sell per year to provide its shareholders a 13 percent rate of return on this invest ent6 A. -0.10 ". .%.-2 C. .3.73 #. /+.17 E. /2.-7
11-+%
Chapter 11 Project Analysis and Evaluation Ans!er Key
1. Forecasting risk is defined as the possibility that: A. so e proposed projects !ill be rejected. ". so e proposed projects !ill be te porarily delayed. C. incorrect decisions !ill be ade due to erroneous cash flo! projections. #. so e projects !ill be utually e$clusive. E. ta$ rates could change over the life of a project. @efer to section 11.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#" Section: ""$" %o&ic: 'orecasting ris(
%. &cenario analysis is defined as the: A. deter ination of the initial cash outlay re'uired to i ple ent a project. B. deter ination of changes in (P) esti ates !hen !hat-if 'uestions are posed. C. isolation of the effect that a single variable has on the (P) of a project. #. separation of a project*s sunk costs fro its opportunity costs. E. analysis of the effects that a project*s ter inal cash flo!s has on the project*s (P). @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-++
+. An analysis of the change in a project*s (P) !hen a single variable is changed is called ,,,,, analysis. A. forecasting ". scenario C. sensitivity #. si ulation E. break-even @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
-. An analysis !hich co bines scenario analysis !ith sensitivity analysis is called ,,,,, analysis. A. forecasting ". co bined C. co ple$ D. si ulation E. break-even @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Simulation analysis
11-+-
.. )ariable costs can be defined as the costs that: A. re ain constant for all ti e periods. ". re ain constant over the short run. C. vary directly !ith sales. #. are classified as non-cash e$penses. E. are inversely related to the nu ber of units sold. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: +ariable costs
/. Fi$ed costs: A. change as a s all 'uantity of output produced changes. B. are constant over the short-run regardless of the 'uantity of output produced. C. are defined as the change in total costs !hen one ore unit of output is produced. #. are subtracted fro sales to co pute the contribution argin. E. can be ignored in scenario analysis since they are constant over the life of a project. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: 'i,ed costs
11-+.
0. 1he change in revenue that occurs !hen one A. arginal revenue. ". average revenue. C. total revenue. #. erosion. E. scenario revenue. @efer to section 11.+
ore unit of output is sold is referred to as:
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: -arginal re!enue
2. 1he change in variable costs that occurs !hen production is increased by one unit is referred to as the: A. arginal cost. ". average cost. C. total cost. #. scenario cost. E. net cost. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: -arginal cost
11-+/
3. "y definition4 !hich one of the follo!ing point6 A. net present value ". internal rate of return C. contribution argin D. net inco e E. operating cash flo! @efer to section 11.+
ust e'ual 5ero at the accounting break-even
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
17. "y definition4 !hich one of the follo!ing A. net present value ". internal rate of return C. contribution argin #. net inco e E. operating cash flo! @efer to section 11.-
ust e'ual 5ero at the cash break-even point6
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Cas/ brea(#e!en
11-+0
11. 8hich one of the follo!ing is defined as the sales level that corresponds to a 5ero (P)6 A. accounting break-even ". leveraged break-even C. arginal break-even #. cash break-even E. financial break-even @efer to section 11.-
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$. %o&ic: 'inancial brea(#e!en
1%. 9perating leverage is the degree of dependence a fir A. variable costs. B. fi$ed costs. C. sales. #. operating cash flo!s. E. net !orking capital. @efer to section 11..
places on its:
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: O&erating le!erage
11-+2
1+. 8hich one of the follo!ing is the relationship bet!een the percentage change in operating cash flo! and the percentage change in 'uantity sold6 A. degree of sensitivity B. degree of operating leverage C. accounting break-even #. cash break-even E. contribution argin @efer to section 11..
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
1-. "ell 8eather :oods has several proposed independent projects that have positive (P)s. ;o!ever4 the fir cannot initiate any of the projects due to a lack of financing. 1his situation is referred to as: A. financial rejection. ". project rejection. C. soft rationing. #. arginal rationing. E. capital rationing. @efer to section 11./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#0 Section: ""$1 %o&ic: Ca&ital rationing
11-+3
1.. 1he procedure of allocating a fi$ed a ount of funds for capital spending to each business unit is called: A. arginal spending. ". capital preservation. C. soft rationing. #. hard rationing. E. arginal rationing. @efer to section 11./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#0 Section: ""$1 %o&ic: Soft rationing
1/. PC Enterprises !ants to co ence a ne! project but is unable to obtain the financing under any circu stances. 1his fir is facing: A. financial deferral. ". financial allocation. C. capital allocation. #. arginal rationing. E. hard rationing. @efer to section 11./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#0 Section: ""$1 %o&ic: 2ard rationing
11--7
10. Forecasting risk e phasi5es the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. ethod of analysis used to ake the decision. ". initial cash outflo!. C. ability to recoup any invest ent in net !orking capital. D. accuracy of the projected cash flo!s. E. length of the project. @efer to section 11.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#" Section: ""$" %o&ic: 'orecasting ris(
12. &teve is fairly cautious !hen analy5ing a ne! project and thus he projects the ost opti istic4 the ost realistic4 and the ost pessi istic outco e that can reasonably be e$pected. 8hich type of analysis is &teve using6 A. si ulation testing ". sensitivity analysis C. break-even analysis #. rationing analysis E. scenario analysis @efer to section 11.%
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11--1
13. &cenario analysis is best suited to acco plishing !hich one of the follo!ing !hen analy5ing a project6 A. deter ining ho! fi$ed costs affect (P) ". esti ating the residual value of fi$ed assets C. identifying the potential range of reasonable outco es #. deter ining the ini al level of sales re'uired to break-even on an accounting basis E. deter ining the ini al level of sales re'uired to break-even on a financial basis @efer to section 11.%
%7. 8hich one of the follo!ing !ill be used in the co putation of the best-case analysis of a proposed project6 A. ini al nu ber of units that are e$pected to be produced and sold ". the lo!est e$pected salvage value that can be obtained for a project*s fi$ed assets C. the ost anticipated sales price per unit D. the lo!est variable cost per unit that can reasonably be e$pected E. the highest level of fi$ed costs that is actually anticipated @efer to section 11.%
11--%
%1. 1he base case values used in scenario analysis are the ones considered the A. opti istic. ". desired by anage ent. C. pessi istic. #. conducive to creating a positive net present value. E. likely to occur. @efer to section 11.%
ost:
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
%%. 8hich of the follo!ing variables !ill be at their highest e$pected level under a !orst case scenario6 <. fi$ed cost <<. sales price <<<. variable cost <). sales 'uantity A. < only ". <<< only C. << and <<< only D. < and <<< only E. <4 <<<4 and <) only @efer to section 11.%
11--+
%+. 8hen you assign the lo!est anticipated sales price and the highest anticipated costs to a project4 you are analy5ing the project under the condition kno!n as: A. best case sensitivity analysis. ". !orst case sensitivity analysis. C. best case scenario analysis. D. !orst case scenario analysis. E. base case scenario analysis. @efer to section 11.%
%-. 8hich one of the follo!ing state ents concerning scenario analysis is correct6 A. 1he pessi istic case scenario deter ines the a$i u loss4 in current dollars4 that a fir could possibly incur fro a given project. ". &cenario analysis defines the entire range of results that could be reali5ed fro a proposed invest ent project. C. &cenario analysis deter ines !hich variable has the greatest i pact on a project*s final outco e. D. &cenario analysis helps anagers analy5e various outco es that are possible given reasonable ranges for each of the assu ptions. E. =anage ent is guaranteed a positive outco e for a project !hen the !orst case scenario produces a positive (P). @efer to section 11.%
AACSB: N/A Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11---
%.. &ensitivity analysis deter ines the: A. range of possible outco es given that ost variables are reliable only !ithin a stated range. B. degree to !hich the net present value reacts to changes in a single variable. C. net present value range that can be reali5ed fro a proposed project. #. degree to !hich a project relies on its fi$ed costs. E. ideal ratio of variable costs to fi$ed costs for profit a$i i5ation. @efer to section 11.%
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
%/. Assu e you graph a project*s net present value given various sales 'uantities. 8hich one of the follo!ing is correct regarding the resulting function6 A. 1he steepness of the function relates to the project*s degree of operating leverage. ". 1he steeper the function4 the less sensitive the project is to changes in the sales 'uantity. C. 1he resulting function !ill be a hyperbole. #. 1he resulting function !ill include only positive values. E. 1he slope of the function easures the sensitivity of the net present value to a change in sales 'uantity. @efer to section 11.%
11--.
%0. As the degree of sensitivity of a project to a single variable rises4 the: A. less i portant the variable to the final outco e of the project. ". less volatile the project*s net present value to that variable. C. greater the i portance of accurately predicting the value of that variable. #. greater the sensitivity of the project to the other variable inputs. E. less volatile the project*s outco e. @efer to section 11.%
%2. &ensitivity analysis is based on: A. varying a single variable and easuring the resulting change in the (P) of a project. ". applying differing discount rates to a project*s cash flo!s and easuring the effect on the (P). C. e$panding and contracting the nu ber of years for a project to deter ine the opti al project length. #. the best4 !orst4 and ost e$pected situations. E. various states of the econo y and the probability of each state occurring. @efer to section 11.%
11--/
%3. 8hich type of analysis identifies the variable4 or variables4 that are success of a particular project6 A. leverage ". risk C. break-even D. sensitivity E. cash flo! @efer to section 11.%
ost critical to the
+7. &i ulation analysis is based on assigning a ,,,,, and analy5ing the results. A. narro! range of values to a single variable ". narro! range of values to ultiple variables si ultaneously C. !ide range of values to a single variable D. !ide range of values to ultiple variables si ultaneously E. single value to each of the variables @efer to section 11.%
11--0
+1. 8hich one of the follo!ing types of analysis is the A. scenario ". break-even C. sensitivity #. degree of operating leverage E. si ulation @efer to section 11.%
ost co ple$ to conduct6
+%. 1ed is analy5ing a project using si ulation. ;is focus is li ited to the short-ter . 1o ease the si ulation process4 he is co bining e$penses into various categories. 8hich one of the follo!ing should he include in the fi$ed cost category6 A. production depart ent payroll ta$es B. e'uip ent insurance C. sales ta$ #. ra! aterials E. product shipping costs @efer to section 11.%
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Simulation analysis
11--2
++. 8hich one of the follo!ing state ents concerning variable costs is correct6 A. )ariable costs inus fi$ed costs e'ual arginal costs. ". )ariable costs are e'ual to fi$ed costs !hen production is e'ual to 5ero. C. An increase in variable costs increases the operating cash flo!. #. )ariable costs are inversely related to fi$ed costs. E. )ariable costs per unit are inversely related to the contribution argin per unit. @efer to section 11.+
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: +ariable costs
+-. 8hich of the follo!ing are inversely related to variable costs per unit6 <. contribution argin per unit <<. nu ber of units sold <<<. operating cash flo! per unit <). net profit per unit A. < and << only ". <<< and <) only C. <<4 <<<4 and <) only D. <4 <<<4 and <) only E. <4 <<4 <<<4 and <) @efer to section 11.+
AACSB: N/A Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* %o&ic: +ariable costs
11--3
+.. &teve4 the sales anager for 1> Products4 !ants to sponsor a one-!eek ?Custo er Appreciation &ale? !here the fir offers to sell additional units of a product at the lo!est price possible !ithout negatively affecting the fir *s profits. 8hich one of the follo!ing represents the price that should be charged for the additional units during this sale6 A. average variable cost ". average total cost C. average total revenue #. arginal revenue E. arginal cost @efer to section 11.+
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: -arginal cost
+/. 1he president of :lobal 8holesalers !ould like to offer special sale prices to the fir *s best custo ers under the follo!ing ter s: 1. 1he prices !ill apply only to units purchased in e$cess of the 'uantity nor ally purchased by a custo er. %. 1he units purchased ust be paid for in cash at the ti e of sale. +. 1he total 'uantity sold under these ter s cannot e$ceed the e$cess capacity of the fir . -. 1he net profit of the fir should not be affected. .. 1he prices !ill be in effect for one !eek only. :iven these conditions4 the special sale price should be set e'ual to the: A. average variable cost of aterials only. ". average cost of all variable inputs. C. sensitivity value of the variable costs. #. arginal cost of aterials only. E. arginal cost of all variable inputs. @efer to section 11.+
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: -arginal cost
11-.7
+0. 1he contribution argin per unit is e'ual to the: A. sales price per unit inus the total costs per unit. ". variable cost per unit inus the fi$ed cost per unit. C. sales price per unit inus the variable cost per unit. #. pre-ta$ profit per unit. E. afterta$ profit per unit. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Contribution margin
+2. 8hich of the follo!ing values !ill be e'ual to 5ero !hen a fir accounting break-even level of output6 <. operating cash flo! <<. internal rate of return <<<. net inco e <). payback period A. < only ". <<< only C. << and <<< only #. < and <) only E. <4 <<4 and <<< only @efer to section 11.+
is producing the
AACSB: N/A Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
11-.1
+3. An increase in !hich of the follo!ing !ill increase the accounting break-even 'uantity6 Assu e straight-line depreciation is used. <. annual salary for the fir *s president <<. contribution argin per unit <<<. cost of e'uip ent re'uired by a project <). variable cost per unit A. < and <<< only ". < and <) only C. << and <<< only D. <4 <<<4 and <) only E. <4 <<4 and <) only @efer to section 11.+
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
-7. 8ebster <ron 8orks started a ne! project last year. As it turns out4 the project has been operating at its accounting break-even level of output and is no! e$pected to continue at that level over its lifeti e. :iven this4 you kno! that the project: A. !ill never pay back. ". has a 5ero net present value. C. is operating at a higher level than if it !ere operating at its cash break-even level. #. is operating at a higher level than if it !ere operating at its financial break-even level. E. is lo!ering the total net inco e of the fir . @efer to section 11.+
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
11-.%
-1. :iven the follo!ing4 !hich feature identifies the ost desirable level of output for a project6 A. operating cash flo! e'ual to the depreciation e$pense ". payback period e'ual to the project*s life C. discounted payback period e'ual to the project*s life #. 5ero <@@ E. 5ero operating cash flo! @efer to sections 11.+ and 11.-
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* and ""$. %o&ic: Brea(#e!en le!els
-%. At the accounting break-even point4 the: A. payback period ust e'ual the re'uired payback period. ". (P) is 5ero. C. <@@ is 5ero. #. contribution argin per unit e'uals the fi$ed costs per unit. E. contribution argin per unit is 5ero. @efer to section 11.+
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
11-.+
-+. A project has a payback period that e$actly e'uals the project*s life. 1he project is operating at: A. its a$i u capacity. ". the financial break-even point. C. the cash break-even point. D. the accounting break-even point. E. a 5ero level of output. @efer to section 11.+
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
--. )alerie just co pleted analy5ing a project. ;er analysis indicates that the project !ill have a /-year life and re'uire an initial cash outlay of A+%74777. Annual sales are esti ated at A.234777 and the ta$ rate is +- percent. 1he net present value is a negative A+%74777. "ased on this analysis4 the project is e$pected to operate at the: A. a$i u possible level of production. ". ini u possible level of production. C. financial break-even point. #. accounting break-even point. E. cash break-even point. @efer to section 11.-
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Cas/ brea(#e!en
11-.-
-.. A project has a projected <@@ of negative 177 percent. 8hich one of the follo!ing state ents ust also be true concerning this project6 A. 1he discounted payback period e'uals the life of the project. ". 1he operating cash flo! is positive and e'ual to the depreciation. C. 1he net present value of the project is negative and e'ual to the initial invest ent. #. 1he payback period is e$actly e'ual to the life of the project. E. 1he net present value of the project is e'ual to 5ero. @efer to section 11.-
AACSB: N/A Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Cas/ brea(#e!en
-/. 8hich of the follo!ing characteristics relate to the cash break-even point for a given project6 <. 1he project never pays back. <<. 1he <@@ e'uals the re'uired rate of return. <<<. 1he (P) is negative and e'ual to the initial cash outlay. <). 1he operating cash flo! is e'ual to the depreciation e$pense. A. < and <<< only ". << and <) only C. <4 <<4 and <<< only #. <<4 <<<4 and <) only E. <4 <<4 <<<4 and <) @efer to section 11.-
AACSB: N/A Bloom's: Com&re/ension Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Cas/ brea(#e!en
11-..
-0. 8hen the operating cash flo! of a project is e'ual to 5ero4 the project is operating at the: A. a$i u possible level of production. ". ini u possible level of production. C. financial break-even point. #. accounting break-even point. E. cash break-even point. @efer to section 11.-
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Cas/ brea(#e!en
-2. 8hich one of the follo!ing represents the level of output !here a project produces a rate of return just e'ual to its re'uire ent6 A. capital break-even ". cash break-even C. accounting break-even D. financial break-even E. internal break-even @efer to section 11.-
11-./
-3. 8hich of the follo!ing state ents are identified !ith financial break-even point6 <. 1he present value of the cash inflo!s e$actly offsets the initial cash outflo!. <<. 1he payback period is e'ual to the life of the project. <<<. 1he (P) is 5ero. <). 1he discounted payback period e'uals the life of the project. A. < and << only ". < and <<< only C. << and <) only #. <4 <<4 and <<< only E. <4 <<<4 and <) only @efer to section 11.-
AACSB: N/A Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$. %o&ic: 'inancial brea(#e!en
.7. Bou !ould like to kno! the ini u level of sales that is needed for a project to be accepted based on its net present value. 1o deter ine that sales level you should co pute the: A. contribution argin per unit and set that argin e'ual to the fi$ed costs per unit. ". contribution argin per unit. C. accounting break-even point. #. cash break-even point. E. financial break-even point. @efer to section 11.-
11-.0
.1. 1heresa is analy5ing a project that currently has a projected (P) of 5ero. 8hich of the follo!ing changes that she is considering !ill help that project produce a positive (P) instead6 Consider each change independently. <. increase the 'uantity sold <<. decrease the fi$ed leasing cost for e'uip ent <<<. decrease the labor hours needed to produce one unit <). increase the sales price A. < and << only ". < and <) only C. <<4 <<<4 and <) only #. <4 <<4 and <) only E. <4 <<4 <<<4 and <) @efer to section 11.-
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$. %o&ic: 'inancial brea(#e!en
.%. Bou are considering a project that you believe is 'uite risky. 1o reduce any potentially har ful results fro accepting this project4 you could: A. lo!er the degree of operating leverage. ". lo!er the contribution argin per unit. C. increase the initial cash outlay. #. increase the fi$ed costs per unit !hile lo!ering the contribution argin per unit. E. lo!er the operating cash flo! of the project. @efer to section 11..
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
11-.2
.+. 8hich one of the follo!ing characteristics best describes a project that has a lo! degree of operating leverage6 A. high variable costs relative to the fi$ed costs ". relatively high initial cash outlay C. an 9CF that is highly sensitive to the sales 'uantity #. high level of forecasting risk E. a high depreciation e$pense @efer to section 11..
.-. 8hich one of the follo!ing !ill best reduce the risk of a project by lo!ering the degree of operating leverage6 A. hiring te porary !orkers fro an e ploy ent agency rather than hiring part-ti e production e ployees B. subcontracting portions of the project rather than purchasing ne! e'uip ent to do all the !ork in-house C. leasing e'uip ent on a long-ter basis rather than buying e'uip ent #. lo!ering the projected selling price per unit E. changing the proposed labor-intensive production ethod to a ore capital intensive ethod @efer to section 11..
11-.3
... 1he degree of operating leverage is e'ual to: A. the percentage change in 'uantity divided by the percentage change in 9CF. ". the percentage change in sales divided by the percentage change in 9CF. C. 1 C FCD9CF. #. 1 C )CD9CF. E. 1 - EFC C )CFD9CF. @efer to section 11..
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
./. Gpto!n Pro otions has three divisions. As part of the planning process4 the CF9 re'uested that each division sub it its capital budgeting proposals for ne$t year. 1hese proposals represent positive net present value projects that fall !ithin the long-range plans of the fir . 1he re'uests fro the divisions are A-.% illion4 A+.1 illion4 and A/.2 illion4 respectively. For the fir as a !hole4 Gpto!n Pro otions is li ited to spending A17 illion for ne! projects ne$t year. 1his is an e$a ple of: A. scenario analysis. ". sensitivity analysis. C. deter ining operating leverage. D. soft rationing. E. hard rationing. @efer to section 11./
11-/7
.0. "rubaker H :oss has received re'uests for capital invest ent funds for ne$t year fro each of its five divisions. All re'uests represent positive net present value projects. All projects are independent. &enior anage ent has decided to allocate the available funds based on the profitability inde$ of each project since the co pany has insufficient funds to fulfill all of the re'uests. =anage ent is follo!ing a practice kno!n as: A. scenario analysis. ". sensitivity analysis. C. leveraging. #. hard rationing. E. soft rationing. @efer to section 11./
.2. 1he CF9 of Ed!ard*s Food #istributors is continually receiving capital funding re'uests fro its division anagers. 1hese re'uests are seeking funding for positive net present value projects. 1he CF9 continues to deny all funding re'uests due to the financial situation of the co pany. Apparently4 the co pany is: A. operating at the accounting break-even point. ". operating at the financial break-even point. C. facing hard rationing. #. operating !ith 5ero leverage. E. operating at a$i u capacity. @efer to section 11./
AACSB: N/A Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#0 Section: ""$1 %o&ic: 2ard rationing
11-/1
.3. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 plus or inus % percent. 8hat is the sales revenue under the !orst case scenario6 A. A14/2/42%. ". A14-3/4%.7 C. A14-//4+%. #. A14.-+4.77 E. A14/%74/0. &ales8orst case J E%4177 7.3.F EA0.7 .32F J A14-//4+%.
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
/7. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 give or take % percent. 8hat is the contribution argin per unit under the best case scenario6 A. A%73..% ". A-3-./7 C. A-/3..% #. A-37.77 E. A.1..-7 Contribution arginbest case J EA0.7 1.7%F - EA%/7 7.3/F J A.1..-7
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Contribution margin
11-/%
/1. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 give or take % percent. 8hat is the a ount of the total costs per unit under the !orst case scenario6 A. A.-2..2 B. A.00.-. C. A/7-.1/ #. A/+2.%+ E. A/-7.%. 1otal costs per unit!orst case J LEA%4177 7.3.F E%/7 1.7-F C EA.234777 1.7-FMDE%4177 7.3.F J A.00.-.
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
/%. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 give or take % percent. 1he ta$ rate is +. percent. 1he co pany is conducting a sensitivity analysis on the sales price using a sales price esti ate of A0... 8hat is the operating cash flo! based on this analysis6 A. A++0430. ". A%3+4723 C. A2/4/0. #. A+.-420E. A+/2471. 9CF NLE0.. - A%/7F %4177M - A.234777O N1 - 7.+.O C EA1%34777 7.+.F J A++0430.
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
11-/+
/+. Precise =achinery is analy5ing a proposed project. 1he co pany e$pects to sell %4177 units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected fi$ed costs are A.234777. Cost esti ates are considered accurate !ithin a plus or inus percent range. 1he depreciation e$pense is A1%34777. 1he sales price is esti ated at A0.7 per unit4 give or take % percent. 1he ta$ rate is +. percent. 1he co pany is conducting a sensitivity analysis !ith fi$ed costs of A.374777. 8hat is the 9CF given this analysis6 A. A++0430. ". A%2.4+.7 C. A++74.77 #. A+.-420E. A-1-4+.7 9CF NLE0.7 - A%/7F %4177M - A.374777O N1 - 7.+.O C EA1%34777 7.+.F J A++74.77
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
/-. =iller =fg. is analy5ing a proposed project. 1he co pany e$pects to sell 24777 units4 plus or inus % percent. 1he e$pected variable cost per unit is A11 and the e$pected fi$ed costs are A%204777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus . percent range. 1he depreciation e$pense is A/24777. 1he ta$ rate is +% percent. 1he sales price is esti ated at A/- a unit4 plus or inus + percent. 8hat is the earnings before interest and ta$es under the base case scenario6 A. A-/43%7 ". A3+41/7 C. A11-43%7 D. A/34777 E. A.24-27 E"<1 for base case J L24777 EA/- - A11FM - A%204777 - A/24777 J A/34777
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-/-
/.. =iller =fg. is analy5ing a proposed project. 1he co pany e$pects to sell 24777 units4 plus or inus % percent. 1he e$pected variable cost per unit is A11 and the e$pected fi$ed costs are A%204777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus . percent range. 1he depreciation e$pense is A/24777. 1he ta$ rate is +% percent. 1he sales price is esti ated at A/- a unit4 give or take + percent. 8hat is the operating cash flo! under the best case scenario6 A. A1--41.7 ". A1-24-0. C. A17041-/ #. A1/24/+7 E. A10-4%%7 9CFbest case J NNLEA/- 1.7+F - EA11 7.3.FM E24777 1.7%FO - EA%204777 7.3.FO N1 - 7.+%O C EA/24777 7.+%F J A1--41.7
//. =iller =fg. is analy5ing a proposed project. 1he co pany e$pects to sell 24777 units4 plus or inus % percent. 1he e$pected variable cost per unit is A11 and the e$pected fi$ed costs are A%204777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus . percent range. 1he depreciation e$pense is A/24777. 1he ta$ rate is +% percent. 1he sales price is esti ated at A/- a unit4 give or take + percent. 8hat is the net inco e under the !orst case scenario6 A. A24.02 B. A124%%2 C. A1.42-/ #. A%7407E. A%-4/3/ (et inco e!orst J NNLEA/- 7.30F - EA11 1.7.FM E24777 7.32FO - EA%204777 1.7.F A/24777O N1 - 7.+%O J A124%%2
11-/.
/0. &tellar Plastics is analy5ing a proposed project. 1he co pany e$pects to sell 1%4777 units4 plus or inus + percent. 1he e$pected variable cost per unit is A+.%7 and the e$pected fi$ed costs are A+74777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus . percent range. 1he depreciation e$pense is A%/4777. 1he ta$ rate is +- percent. 1he sales price is esti ated at A0..7 a unit4 plus or inus - percent. 8hat is the operating cash flo! for a sensitivity analysis using total fi$ed costs of A+147776 A. A134.27 B. A%%4-+/ C. A%04%17 #. A+14-/7 E. A+04.-7 9CF J LE1%4777 EA0..7 - A+.%7FM - A+14777ML1- 7.+-M CEA%/4777 7.+-F J A%%4-+/
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
/2. &unset Gnited is analy5ing a proposed project. 1he co pany e$pects to sell 1.4777 units4 plus or inus - percent. 1he e$pected variable cost per unit is A1%7 and the e$pected fi$ed costs are A+114777. 1he fi$ed and variable cost esti ates are considered accurate !ithin a plus or inus + percent range. 1he depreciation e$pense is A0-4777. 1he ta$ rate is +. percent. 1he sales price is esti ated at A107 a unit4 plus or inus % percent. 8hat is the contribution argin per unit for a sensitivity analysis using a variable cost per unit of A1%.6 A. A+7 B. A-. C. A.7 #. A%E. A%0 Contribution argin J A107 - A1%. J A-.
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
11-//
/3. Bour co pany is revie!ing a project !ith esti ated labor costs of A%1.%7 per unit4 esti ated ra! aterial costs of A+0.12 a unit4 and esti ated fi$ed costs of A%74777 a onth. &ales are projected at -%4777 units over the one-year life of the project. All esti ates are accurate !ithin a range of plus or inus . percent. 8hat are the total variable costs for the !orst-case scenario6 A. A2374-77 ". A14./14./7 C. A%4--.42+7 #. A%4-.143/7 E. A%4/3143/7 1otal variable costs J LEA%1.%7 C A+0.12F 1.7.ML-%4777 7.3.M J A%4--.42+7
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$* %o&ic: Scenario analysis
07. A project has earnings before interest and ta$es of A1-4/774 fi$ed costs of A.%47774 a selling price of A%3 a unit4 and a sales 'uantity of 1/4777 units. All esti ates are accurate !ithin a plusD inus range of + percent. #epreciation is A1%4777. 8hat is the base case variable cost per unit6 A. A%%.1/ ". A%+.2C. A%-.73 #. A%-.%+ E. A%..12 L1/4777 EA%3 - vFM - A.%4777 - A1%4777 J A1-4/77I v J A%-.73
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#) Section: ""$* %o&ic: Scenario analysis
11-/0
01. At a production level of -4.77 units4 a project has total costs of A1724777. 1he variable cost per unit is A11.%7. Assu e the fir can increase production by 14777 units !ithout increasing its fi$ed costs. 8hat !ill the total costs be if -4277 units are produced6 A. A17%4027 ". A17-4/-7 C. A17/4-77 #. A1724777 E. A1114+/7 1otal cost J LA1724777 - EA11.%7 -4.77FM C E-4277 A11.%7F J A1114+/7
AACSB: Analytic Bloom's: A&&lication Difficulty: 3ntermediate Learning Ob ecti!e: ""#) Section: ""$* %o&ic: %otal costs
0%. A co pany is considering a project !ith a cash break-even point of %%4/77 units. 1he selling price is A%2 a unit4 the variable cost per unit is A1+4 and depreciation is A1-4777. 8hat is the projected a ount of fi$ed costs6 A. A+%.4777 B. A++34777 C. A+-%4777 #. A+-24777 E. A+.+4777 FCcash break-even J %%4/77 EA%2 - A1+F J A++34777
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Cas/ brea(#e!en &oint
11-/2
0+. At the accounting break-even point4 &!iss =ountain :ear sells 1-4/77 ski asks at a price of A17 each. At this level of production4 the depreciation is A.24777 and the variable cost per unit is A-. 8hat is the a ount of the fi$ed costs at this production level6 A. A%34/77 ". A.%4-77 C. A/14+77 #. A204/77 E. A1-.4/77 Fi$ed costsaccounting break-even J L1-4/77 EA17 - A-FM - A.24777 J A%34/77
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
0-. 1he Coffee E$press has co puted its fi$ed costs to be A7.+- for every cup of coffee it sells given annual sales of %1%4777 cups. 1he sales price is A1.-3 per cup !hile the variable cost per cup is A7./+. ;o! any cups of coffee ust it sell to break-even on a cash basis6 A. 2+421". 3/4-07 C. 1%+4317 #. 1/04/+7 E. %1%4777 Pcash break-even J EA7.+- %1%4777FDEA1.-3 - A7./+F J 2+421- cups
AACSB: Analytic Bloom's: A&&lication Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Cas/ brea(#e!en
11-/3
0.. 1he =etal &hop produces 1.2 illion etal fasteners a year for industrial use. At this level of production4 its total fi$ed costs are A+024777 and its total costs are A.%%4777. 1he fir can increase its production by . percent4 !ithout increasing either its total fi$ed costs or its variable costs per unit. A custo er has ade a one-ti e offer for an additional .74777 units at a price per unit of A7.17. &hould the fir sell the additional units at the offered price6 8hy or !hy not6 A. yesI 1he offered price is less than the arginal cost. ". yesI 1he offered price is e'ual to the arginal cost. C. yesI 1he offered price is greater than the arginal cost. #. noI 1he offered price is less than the arginal cost. E. noI 1he offered price is greater than the arginal cost. )ariable cost per unit J EA.%%4777 - A+024777FD142774777 J A7.72 per unit 1he arginal cost per unit !ill be A7.72 since the variable cost per unit !ill be unchanged. 1he order should be accepted since the offered price e$ceeds the arginal cost per unit.
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* %o&ic: -arginal cost
0/. 8e$ford <ndustrial &upply is considering a ne! project !ith esti ated depreciation of A%/47774 fi$ed costs of A0347774 and total sales of A1204777. 1he variable costs per unit are esti ated at A11.27. 8hat is the accounting break-even level of production6 A. -4201 units ". .4+++ units C. .4-1. units D. /43-3 units E. 04%-2 units Paccounting break-even J EA034777 C A%/4777FDLEA1204777DPF - A11.27M P J /43-3 units
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
11-07
00. 1he accounting break-even production 'uantity for a project is 114/-7 units. 1he fi$ed costs are A%1/4777 and the contribution argin per unit is A%2. 1he fi$ed assets re'uired for the project !ill be depreciated on straight-line basis to 5ero over the project*s .-year life. 8hat is the a ount of fi$ed assets re'uired for this project6 A. A+%.43%7 B. A.-34/77 C. A0-24.77 #. A147274777 E. A14/%34/77 #epreciationaccounting break-even J E114/-7 A%2F - A%1/4777 J A17343%7 Fi$ed asset cost J A17343%7 . J A.-34/77
02. A project has an accounting break-even point of 1.4+%3 units. 1he fi$ed costs are A+2%4777 and the projected variable cost per unit is A%3.17. 1he project !ill re'uire A0274777 for fi$ed assets !hich !ill be depreciated straight-line to 5ero over the project*s /-year life. 8hat is the projected sales price per unit6 A. A-0./. ". A-2.12 C. A.-.7% #. A././0 E. A/%..7 1.4+%3 J LA+2%4777 C EA0274777D/FMDEP - A%3.17FI P J A/%..7
11-01
03. A proposed project has fi$ed costs of A342774 depreciation e$pense of A%40774 and a sales 'uantity of %4177 units. 1he total variable costs are A.4/70. 8hat is the contribution argin per unit if the projected level of sales is the accounting break-even point6 A. A+.%2 ". A-.70 C. A..3. #. A/.1/ E. A0.11 Contribution argin J EA34277 C A%4077FD%4177 J A..3.
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
27. &pencer 1ools !ould like to offer a special product to its best custo ers. ;o!ever4 the fir !ants to li it its a$i u potential loss on this product to the fir *s initial invest ent in the project. 1he fi$ed costs are esti ated at A%147774 the depreciation e$pense is A1147774 and the contribution argin per unit is A1%..7. 8hat is the ini u nu ber of units the fir should pre-sell to ensure its potential loss does not e$ceed the desired level6 A. 14%%7 units B. 14/27 units C. %4%1. units #. %4./7 units E. %40.7 units Cash break-even point J A%14777DA1%..7 J 14/27 units
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Cas/ brea(#e!en
11-0%
21. 1he =otor 8orks is considering an e$pansion project !ith esti ated annual fi$ed costs of A0147774 depreciation of A+24.774 variable costs per unit of A10.37 and an esti ated sales price of A%2 per unit. ;o! any units ust the fir sell to break-even on a cash basis6 A. /4.%1 units B. 047+7 units C. 04.17 units #. 34//0 units E. 1742-% units Pcash break-even J A014777DEA%2 - A10.37F J 047+7
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Cas/ brea(#e!en
2%. A proposed project has a contribution argin per unit of A1+.174 fi$ed costs of A0-47774 depreciation of A1%4.774 variable costs per unit of A%%4 and a financial break-even point of 114+/7 units. 8hat is the operating cash flo! at this level of output6 A. A7 ". A1%4.77 C. A/%4+73 D. A0-421/ E. A2/4.77 9CFfinancial break-even J E114+/7 A1+.17F - A0-4777 J A0-421/
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#* Section: ""$. %o&ic: 'inancial brea(#e!en
11-0+
2+. Cantor*s has been busy analy5ing a ne! product. 1hus far4 anage ent has deter ined that an 9CF of A%124%77 !ill result in a 5ero net present value for the project4 !hich is the ini u re'uire ent for project acceptance. 1he fi$ed costs are A+%34777 and the contribution argin per unit is A%1/.-7. 1he co pany feels that it can realistically capture %.. percent of the 1174777 unit arket for this product. 1he ta$ rate is +- percent and the re'uired rate of return is 11 percent. &hould the co pany develop the ne! product6 8hy or !hy not6 A. BesI 1he project*s e$pected <@@ e$ceeds the re'uired rate of return. B. BesI 1he e$pected level of sales e$ceeds the re'uired level of production. C. (oI 1he re'uired level of production e$ceeds the e$pected level of sales. #. (oI 1he <@@ is less than the re'uired rate of return. E. (oI 1he project !ill never payback on a discounted basis. Financial break-even point J EA+%34777 C A%124%77FDA%1/.-7 J %4.%2./. units E$pected sales J 1174777 7.7%. J %40.7 units. 1he project should be accepted because the e$pected level of sales is greater than the financial break-even 'uantity.
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$. %o&ic: 'inancial brea(#e!en
2-. 1ucker*s 1rucking is considering a project !ith a discounted payback period just e'ual to the project*s life. 1he projections include a sales price of A+24 variable cost per unit of A12..74 and fi$ed costs of A+%4777. 1he operating cash flo! is A134077. 8hat is the break-even 'uantity6 A. /+1 units ". 14%11 units C. 14/-1 units #. %4+71 units E. %4/.1 units Pfinancial break-even J EA+%4777 C A134077FDEA+2 - A12..7F J %4/.1 units
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$. %o&ic: 'inancial brea(#e!en
11-0-
2.. Bou are in charge of a project that has a degree of operating leverage of %./-. 8hat !ill happen to the operating cash flo!s if the nu ber of units you sell increase by / percent6 A. 1..2- percent decrease ". %.%0 percent decrease C. no change #. %.%0 percent increase E. 1..2- percent increase Percentage change in 9CF J %./- 7.7/ J 1..2- percent increase
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
2/. 1he accounting anager of :ate!ay <nns has noted that every ti e the inn*s average occupancy rate increases by % percent4 the operating cash flo! increases by ..+ percent. 8hat is the degree of operating leverage if the contribution argin per unit is A-06 A. 7.+2 ". 7..0 C. 1.0. #. %.17 E. %./. #9> J 7.7.+D7.7% J %./.
11-0.
20. &teele <nsulators is analy5ing a ne! type of insulation for interior !alls. =anage ent has co piled the follo!ing infor ation to deter ine !hether or not this ne! insulation should be anufactured. 1he insulation project has an initial fi$ed asset re'uire ent of A1.+ illion4 !hich !ould be depreciated straight-line to 5ero over the 1%-year life of the project. Projected fi$ed costs are A0-%4777 and the anticipated annual operating cash flo! is A%-14777. 8hat is the degree of operating leverage for this project6 A. +.02 ". +.3% C. -.72 #. -.%0 E. -..+ #egree of operating leverage J 1 C EA0-%4777DA%-14777F J -.72
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
22. Bou are the anager of a project that has a %.2 degree of operating leverage and a re'uired return of 1- percent. #ue to the current state of the econo y4 you e$pect sales to decrease by 0 percent ne$t year. 8hat change should you e$pect in the operating cash flo!s ne$t year given your sales prediction6 A. 13./7 percent decrease ". 1/.7+ percent decrease C. 1+.-/ percent decrease #. ../7 percent decrease E. %.0- percent decrease Percentage change in 9CF J %.2 E-7.70F J -7.13/ J 13./7 percent decrease
11-0/

Essay Questions
23. 8hat is operating leverage and !hy is it i portant in the analysis of capital e$penditure projects6 9perating leverage is the degree to !hich a project relies on its fi$ed costs. 1he ore capital intensive a project4 the higher the project*s #9>. 1he higher the #9>4 the greater the percentage change in the project*s operating cash flo!s relative to a one percent change in the project*s sales 'uantity. As long as sales are increasing4 leverage !orks fine. ;o!ever4 !hen sales decline4 leverage agnifies the related percentage decline in 9CF. 1hus4 capital intensive fir s are ore susceptible to forecasting risk. Feedback: @efer to section 11..
AACSB: 4eflecti!e t/in(ing Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
37. 8hat is forecasting risk and !hy is it i portant to the analysis of capital e$penditure projects6 8hat ethods can be used to reduce this risk6 Forecasting risk is the possibility that errors in projected cash flo!s !ill lead to incorrect decisions. Projects are generally accepted !hen they have positive (P)s and rejected !hen they have negative (P)s. <f the cash inflo!s of a project are overesti ated4 the (P) !ill be overstated potentially resulting in an incorrect acceptance of the project. 9n the other hand4 if cash inflo!s are underesti ated4 a good project ight be erroneously rejected. 1o offset so e of this risk4 anagers should e ploy sensitivity and scenario analysis as !ell as break-even analysis to better understand the potential outco es associated !ith the project. Feedback: @efer to sections 11.14 11.%4 and 11.+
AACSB: 4eflecti!e t/in(ing Bloom's: Synt/esis Difficulty: 3ntermediate Learning Ob ecti!e: ""#" Learning Ob ecti!e: ""#) Learning Ob ecti!e: and ""#* Section: ""$"5 ""$) and ""$* %o&ic: 6ro ect analysis
11-00
31. 8hat are the key features of the accounting4 cash4 and financial break-even points6
Feedback: @efer to sections 11.+ and 11.-
AACSB: 4eflecti!e t/in(ing Bloom's: Knowledge Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$* and ""$. %o&ic: Brea(#e!en &oints
3%. Assu e that a country e$periences a financial crisis that causes the nation*s financial arkets to free5e in a anner that prevents a private fir fro raising capital fro any source. E$plain ho! project analysis conducted by that fir !ould !ork in this situation. 1his situation is kno!n as hard rationing. <n this situation4 the fir cannot obtain financing capital regardless of the rate of return offered. 1hus4 no e$ternally-financed projects !ould be acceptable based on the nor al ethods of project analysis. Feedback: @efer to section 11./
AACSB: 4eflecti!e t/in(ing Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#0 Section: ""$1 %o&ic: 2ard rationing
11-02
3+. =r. "ear4 your boss4 !ill only agree to accept a project that4 as a ini u 4 provides a rate of return e'ual to the re'uire ent he has set for the project. :iven this4 e$plain ho! you can use break-even analysis to ascertain !hich projects !ill be acceptable to hi as you don*t !ant to risk hearing hi gro!l if you !aste his ti e presenting hi !ith a project that is unacceptable. 1he financial break-even 'uantity is the sales 'uantity re'uired for a project to produce an <@@ that e'uals the re'uired rate of return. 9nce this 'uantity has been established and the values used in the co putations justified4 you !ould also need to justify that the re'uired level of sales can be obtained. Feedback: @efer to section 11.-
AACSB: 4eflecti!e t/in(ing Bloom's: Com&re/ension Difficulty: 3ntermediate Learning Ob ecti!e: ""#* Section: ""$. %o&ic: 'inancial brea(#e!en
3-. Cool &hades4 <nc. EC&<F anufactures biotech sunglasses. 1he variable aterials cost is A1./3 per unit4 and the variable labor cost is A+.7- per unit. &uppose the fir incurs fi$ed costs of A0.74777 during a year in !hich total production is -.74777 units and the selling price is A11..7 per unit. 8hat is the cash break-even point6 A. 0/4-.+ units ". 224/.% units C. 117402+ units #. 1%24370 units E. 1-740/2 units PCash "reak-even J A0.74777DEA11..7 - A1./3 - A+.7-F J 117402+ units
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic 7OC 8: ""#" Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Cas/ brea(#e!en
11-03
3.. =ountain :ear can anufacture ountain cli bing shoes for A1-.3. per pair in variable ra! aterial costs and A12.-/ per paid in variable labor costs. 1he shoes sell for A1%0 per pair. >ast year4 production !as 1074777 pairs and fi$ed costs !ere A2+74777. 8hat is the ini u acceptable total revenue the co pany should accept for a one-ti e order for an e$tra 174777 pairs6 A. A1-34.77 ". A%204/77 C. A++-4177 #. A+274%11 E. A141/-4177 =arginal total revenue J 174777 EA1-.3. C A12.-/F J A++-4177
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic 7OC 8: ""#) Learning Ob ecti!e: ""#* Section: ""$* %o&ic: -arginal cost
11-27
3/. 8e are evaluating a project that costs A2.-47774 has a 1.-year life4 and has no salvage value. Assu e that depreciation is straight-line to 5ero over the life of the project. &ales are projected at 1.-4777 units per year. Price per unit is A-14 variable cost per unit is A%74 and fi$ed costs are A2/.417% per year. 1he ta$ rate is ++ percent4 and !e re'uire a 1- percent return on this project. &uppose the projections given for price4 'uantity4 variable costs4 and fi$ed costs are all accurate to !ithin 1- percent. 8hat is the !orst-case (P)6 A. A32-4/1+ ". A14%/04772 C. A14-234.11 #. A1402%4-73 E. A1433+4207 9CF8orst J NLEA-1 7.2/F - EA%7 1.1-FML1.-4777 7.2/M - EA2/.417% 1.1-FON1 - 7.++F C EA2.-4777D1.FE7.++F J A-/+4/.2.07
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 7OC 8: ""#1 Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-21
30. A project has a unit price of A.47774 a variable cost per unit of A-47774 fi$ed costs of A10477747774 and depreciation e$pense of A/43074777. 8hat is the accounting break-even 'uantity6 A. /4307 units ". 1747+7 units C. 104777 units #. %14-07 units E. %+4307 units PAccounting break-even J EA1047774777 C A/43074777FDEA.4777 - A-4777F J %+4307 units
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic 7OC 8: ""#9 Learning Ob ecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
32. A project has the follo!ing esti ated data: price J A0- per unitI variable costs J A+3.%% per unitI fi$ed costs J A/4.77I re'uired return J 2 percentI initial invest ent J A24777I life J years. <gnore the effect of ta$es. 8hat is the degree of operating leverage at the financial break-even level of output6 A. %.01/ B. +./31 C. -..%2 #. /.77+ E. 0.++0
#9> J 1 C E/4.77DA%4-1..+0F J +./31
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 7OC 8: ""#: Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
11-2%
33. Consider a project !ith the follo!ing data: accounting break-even 'uantity J %34777 unitsI cash break-even 'uantity J 1.43.7 unitsI life J 17 yearsI fi$ed costs J A%7+4777I variable costs J A%- per unitI re'uired return J 1- percentI depreciation J straight line. <gnoring the effect of ta$es4 !hat is the financial break-even 'uantity6 A. +240%+ units ". +34%71 units C. +34-.2 units #. +34/%- units E. -743/3 units 1.43.7 J A%7+4777DEP - A%-FI P J A+/.0%0%0+ %34777 J EA%7+4777 C #FDEA+/.0%0%0+ - A%-FI # J A1//4737.37 <nitial invest ent J 17 A1//4737.37 J A14//74373
PF J EA%7+4777 C A+124-12.0.FDEA+/.0%0%0+ - A%-F J -743/3 units
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 7OC 8: ""#"; Learning Ob ecti!e: ""#* Section: ""$* and ""$. %o&ic: Brea(#e!en analysis
11-2+
177. At an output level of .74777 units4 you calculate that the degree of operating leverage is 1.2. 8hat !ill be the percentage change in operating cash flo! if the ne! output level is .-4.77 units6 A. ..77 percent ". /.10 percent C. 1/.%7 percent #. 10.-+ percent E. %7.77 percent #9> J 1.2 J Percentage change in 9CFDL.-4.77 - .74777FD.74777MI Q9CF J 1/.%7 percent
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic 7OC 8: ""#"" Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
171. A proposed project has fi$ed costs of A+/4777 per year. 1he operating cash flo! at 124777 units is A/04777. 8hat !ill be the ne! degree of operating leverage if the nu ber of units sold rises to 124.776 A. 1.-/ B. 1..% C. 1./0 #. %.72 E. %.1#9> J 1 C EA+/4777DA/04777F J 1..+0+1+ Percentage change in P J E124.77 - 124777FD124777 J %.0002 percent At 124.77 units4 percentage change in 9CF J 1..+0+1+ .7%0002 J -.%07+ percent (e! 9CF J A/04777 E1 C 7.7-%07+F J A/342/1 At 124.77 units4 #9> J 1 C EA+/4777DA/342/1F J 1..%
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 7OC 8: ""#"* Learning Ob ecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
11-2-
17%. Consider a /-year project !ith the follo!ing infor ation: initial fi$ed asset invest ent J A-/74777I straight-line depreciation to 5ero over the /-year lifeI 5ero salvage valueI price J A+-I variable costs J A13I fi$ed costs J A1224/77I 'uantity sold J 374.%2 unitsI ta$ rate J +% percent. 8hat is the sensitivity of 9CF to changes in 'uantity sold6 A. A17.%7 per unit ". A11.1/ per unit C. A11.+2 per unit #. A1%.++ per unit E. A1%..- per unit 9CF J LEA+- - A13F 374.%2 - 1224/77ML1 - 7.+%M C LEA-/74777D/F 7.+%M J A2134/07.3+ Gsing 314.%2 units: EBou can use any a ount as the second level of 'uantity sold as the sensitivity !ill be the sa e.F 9CF J LEA+- - A13F 314.%2 - 1224/77ML1 - 7.+%M C LEA-/74777D/F 7.+%M J A2%34207.3+ &ensitivity J EA2%34207.3+ - A2134/07.3+FDE314.%2 - 374.%2F J A17.%7
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate 7OC 8: ""#"9 Learning Ob ecti!e: ""#" Section: Analysis %o&ic: Sensiti!ity analysis
11-2.
17+. Bou are considering a ne! product launch. 1he project !ill cost A/+747774 have a .-year life4 and have no salvage valueI depreciation is straight-line to 5ero. &ales are projected at 1/7 units per year4 price per unit !ill be A%-47774 variable cost per unit !ill be A1%47774 and fi$ed costs !ill be A%2+4777 per year. 1he re'uired return is 11 percent and the relevant ta$ rate is +- percent. "ased on your e$perience4 you think the unit sales4 variable cost4 and fi$ed cost projections given here are probably accurate to !ithin 3 percent. 8hat is the !orst case (P)6 A. A+4-104370 B. A%4/.-4%-1 C. A2224/12 #. A+417%41+E. A+4-.247%7 Gnit sales8orst J 1/7 E1 - 7.73F J 1-../ units )ariable cost per unit8orst J A1%4777 E1 C 7.73F J A1+4727 Fi$ed costs8orst J A%2+4777 E1 C 7.73F J A+724-07 9CF8orst J LEA%-4777 - A1+4727FE1-../F - A+724-07ML1 - 7.+-M C 7.+-EA/+74777D.F J A2224/12.1%
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate 7OC 8: ""#": Learning Ob ecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-2/
17-. =c:illa :olf has decided to sell a ne! line of golf clubs. 1he clubs !ill sell for A.77 per set and have a variable cost of A%77 per set. 1he co pany spent A11+4777 for a arketing study that deter ined the co pany !ill sell .24777 sets per year for 0 years. 1he arketing study also deter ined that the co pany !ill lose sales of 1.4777 sets of its high-priced clubs. 1he high-priced clubs sell at A077 and have variable costs of A+77. 1he co pany !ill also increase sales of its cheap clubs by 34777 sets. 1he cheap clubs sell for A%77 and have variable costs of A177 per set. 1he fi$ed costs each year !ill be A04..34777. 1he co pany has also spent A141++4777 on research and develop ent for the ne! clubs. 1he plant and e'uip ent re'uired !ill cost A%147774777 and !ill be depreciated on a straight-line basis. 1he ne! clubs !ill also re'uire an increase in net !orking capital of A147.+4777 that !ill be returned at the end of the project. 1he ta$ rate is -7 percent4 and the cost of capital is 2 percent. 8hat is the <@@6 A. 0..1 percent ". 0.2% percent C. 2.1+ percent #. 2.-3 percent E. 2./% percent &ales J EA.77 .24777F C EA077 E-1.4777FF C A%77 34777F J A%74+774777 )ariable costs J E-A%77 .24777F C E-A+77 E-1.4777FF C E-A177 34777F J -A247774777 #epreciation J A%147774777D0 J A+47774777
11-20
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate 7OC 8: ""#); Learning Ob ecti!e: ""#) Section: ""$) %o&ic: 6ro ect 344
17.. ;ybrid cars are touted as a ?green? alternativeI ho!ever4 the financial aspects of hybrid o!nership are not as clear. Consider a hybrid odel that has a list price of A.4-%7 Eincluding ta$ conse'uencesF ore than a co parable car !ith a traditional gasoline engine. Additionally4 the annual o!nership costs Eother than fuelF for the hybrid !ere e$pected to be A-%7 ore than the traditional odel. 1he EPA ileage esti ate is %+ pg for the traditional odel and %. pg for the hybrid odel. Assu e the appropriate interest rate is 17 percent4 all cash flo!s occur at the end of the year4 you drive 1.4377 iles per year4 and keep either car for / years. 8hat price per gallon !ould ake the decision to buy they hybrid !orth!hile6 A. A12.03 ". A%1.-2 C. A%0.13 #. A%2.+% E. A+7.17
AACSB: Analytic Bloom's: 7!aluation Difficulty: 3ntermediate 7OC 8: ""#)* Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Brea(#e!en analysis
11-22
17/. <n an effort to capture the large jet arket4 ;iro Airplanes invested A1%./2 billion developing its "-374 !hich is capable of carrying 277 passengers. 1he plane has a list price of A%0. illion. <n discussing the plane4 ;iro Airplanes stated that the co pany !ould breakeven !hen %-/ "-37s !ere sold. Assu e the break-even sales figure given is the cash flo! break-even. &uppose the sales of the "-37 last for only 3 years. ;o! any airplanes ust ;iro Airplanes sell per year to provide its shareholders a 13 percent rate of return on this invest ent6 A. -0.10 ". .%.-2 C. .3.73 #. /+.17 E. /2.-7 Cash flo! per plane J A1%4/2747774777D%-/ J A.14.--401. C J Annual cash flo! necessary to deliver a 13 percent return
AACSB: Analytic Bloom's: 7!aluation Difficulty: 3ntermediate 7OC 8: ""#). Learning Ob ecti!e: ""#* Section: ""$. %o&ic: Brea(#e!en analysis
11-23

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Chapter 11 - Project Analysis and Evaluation

Chapter 11 Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

ore unit of output is sold is referred to as:

Chapter 11 - Project Analysis and Evaluation

ust e'ual 5ero at the accounting break-even

ust e'ual 5ero at the cash break-even point6

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

ost critical to the

ost co ple$ to conduct6

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Multiple Choice Questions

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 Project Analysis and Evaluation Ans!er Key

Multiple Choice Questions

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

ore unit of output is sold is referred to as:

Chapter 11 - Project Analysis and Evaluation

ust e'ual 5ero at the accounting break-even

ust e'ual 5ero at the cash break-even point6

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation

ost critical to the

Chapter 11 - Project Analysis and Evaluation

ost co ple$ to conduct6

Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation