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Unit XXII Project Feasibility Studies
1. Which of the following is not an activity covered by feasibility study?
a. Activity based accounting of the endeavor leading to a conclusion.
b. Collection of data
c. Evaluation and analysis of data collected.
d. Formulation of recommendation.
2. Among the following major parts of a project feasibility study, which grouping is
considered critical?
a. Management, financial and social returns
b. Technical, financial and environmental aspects
c. Economic benefits, management, financial
d. Marketing, engineering or technical and financial.
3. Lucky Products, Inc. has the following balance sheet:
Current assets P5, 000 Accounts payable P1, 000
Net fixed assets 5, 000 Notes payable 1, 000

Long-term debt 4, 000
Common equity 4, 000

Total assets P10, 000 Total claims P10, 000

Business has been slow; therefore, fixed assets are vastly underutilized.
Management believes it can double sales next year with the introduction of a new
product. No new fixed assets will be required, and management expects that
there will be no earnings retained next year. What is next years additional
funding requirement?
a. P0
b. P4, 000
c. P6, 000
d. P13, 000
4. The 19x5 balance sheet for Mars Pulp and Paper is shown below (millions of
pesos):




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Cash P3.0 Accounts payable P2.0
Accounts receivable 3.0 Notes payable 1.5
Inventory 5.0 Long-term debt 3.0

Current assets P11.0 Common equity 7.5

Fixed assets 3.0

Total assets P14.0 Total claims P14.0

In 19x5, sales were P60 million. In 19x6, management believes that sales will
increase by 20% to a total of P72 million. The profit margin is expected to be 5%,
and the dividend payout ratio is targeted at 40%. The firm has excess capacity
and no increase in fixed assets will be required. What is the additional funding
requirement for 19x6?
a. P0.36 million
b. P0.24 million
c. P0 million
d. 0.36 million
5. Refer to Problem 4. Assume no excess capacity excess. How much can sales
grow above the 19x5 level of P60 million without requiring any additional funds?
a. 12.28%
b. 14.63%
c. 15.75%
d. 17.65%
6. In project feasibility studies, accounts are usually involved in the financial aspect.
Included in this portion of the study is a set of statements expressing projected
serve as base for the financial projections. The set of expressed statements is
called
a. Statements of Projected Costs.
b. Projected Financial statements
c. Statement of Assumptions
d. Statement of accounts.
7. The statements below about project feasibility studies are true except:
a. Any change which can materially alter the assumptions used in the
preparation of the forecast will render it useless.
b. It is important for government agencies in order to determine entitlement to
government incentives
c. It also covers the social desirability aspects of a proposed undertaking.
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d. Since the data and required is a basic step in its preparation, all the
necessary and required information will always be available.
8. The relevance of particular cost of a decision is determined by the
a. Size of the cost
b. Riskiness of the decision
c. Potential effect on the decision
d. Accuracy and verifiability of the cost.
9. Social regulation is often criticized by industry as inefficient. Firms perceive this
inefficiency to be a result of
a. The failure to consider the marginal benefits relative to the marginal costs.
b. Lenient enforcement policies
c. Concern for the quality of life but not the quality of products
d. The use of the internal revenue tax code instead of strict compliance
penalties
10. Basic steps in the preparation of project study include
a. Gathering and collection of project study include necessary and relevant to all
aspects of the undertaking
b. Evaluation and analysis of the data obtained
c. Formulation of conclusions and recommendations
d. All of the above
11. In a project feasibility study, which of the following statements is false?
a. It is based on available information and opinions of the party involved in the
preparation of the study.
b. The study is primarily a forecast which always tallies with actual events.
c. The characteristics of good feasibility study are comprehensiveness,
objectivity and simplicity.
d. One of the parties interested in feasibility studies is the stockholder
12. In a project feasibility study, which of the following is true?
a. The study is not affected by any significant change in actual business
conditions as compared to the assumptions used in making a forecast.
b. The study is based on available information and opinions of the party involved
in the preparation of the study.
c. (a) and (b)
d. None of the above
13. Sun machines, Inc., has a net income this year of P500 on sales of P2, 000 and
is operating its fixed assets at full capacity. Management expects sales to
increase by 25 percent next year and is forecasting a dividend payout ratio of 30
percent. The profit margin is not expected to change. If spontaneous liabilities
are P500 this year, and no excess funds are expected next year, what is Suns
total assets this year/
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a. P1, 000
b. P1, 500
c. P2,250
d. P3, 000
14. An increase in a firms inventories will call for additional financing unless the
increase is offset by an equal or larger decrease in some other asset account.
a. True
b. False
15. If the capital intensity ratio (A/S) of a firm actually decreases as sales increase,
use of the percentage of sales method will typically overstate the amount of
additional funds required, other things held constant.
a. True
b. False
16. If the dividend payout ratio is 100 percent, all ratios are held constant and the
firm is operating at full capacity, then any increase in sales will require additional
financing.
a. True
b. False
17. Which of the following would reduce the additional funds required if all other
things are held constant?
a. An increase in the dividend payout ratio
b. A decrease in the profit margin
c. An increase in the capital intensity ratio
d. A decrease in the firms tax rate
18. One of the first steps in the percentage of sales method of forecasting is to
identify those asset and liability accounts which increase spontaneously with
retained earnings
a. True
b. False
19. Robert and Company has a total assets turnover of 0.30 and a profit margin of 10
percent. The president is unhappy with the current return on assets, and he
thinks it could be doubled. This could be accomplished (1) by increasing the
profit margin to 15 percent and (2) by increasing the total assets turnover. What
new total assets turnover ratio, along with the 15 percent profit margin is required
to double the return on assets?
a. 30%
b. 35%
c. 40%
d. 45%
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20. Mars and Venus Resa recently leased space in the Plaza Shopping Center and
opened a new business, Resas Ice Cream Shop. Business has been good but
the Resas frequently run out of cash. This has necessitated late payment on
certain ice cream orders, which in turn is beginning to cause a problem with
suppliers. The Resas plan to borrow from a bank to have cash ready as needed,
but first they need to forecast how much cash will be needed. Therefore, they
have decided to prepare a cash budget for June, July, and August to determine
their cash needs.

Ice cream sales are made on a cash basis only. The Resas must pay for their ice
cream orders 1 month after the purchase. Rent is P1, 000 per month, and they
themselves a combined salary of P2, 400 per month. In addition, they must make
a tax payment of P6, 000 in June. The current cash on hand (June 1) is P200,
but the Resas have decided to maintain an average balance of P3, 000.
Estimated ice cream sales and purchases for June, July, and August are given
below. May purchases amounted to P70, 000.

Sales Purchases
June P80, 000 P20, 000
July 20, 000 20, 000
August 30, 000 20, 000


What amount of money must be borrowed or have in surplus in each of the
month in the budget period (June, July, and August)?
a. P2, 200; P5, 600; (P1, 000)*
b. P2, 700; P5, 600; (P1, 000)*
c. P2, 200; P9, 400; (P1, 000)*
d. (P1, 000)*; P4, 700; P500
*The firm projects a cash surplus in this month.
22. The Ken Company is trying to determine an acceptable growth rate in sales,
while the firm wants to expand, it does not want to use any external funds to
support such expansion due to the particularly high rates in the market now.
Having gathered the following data for the firm, what is the maximum growth it
can sustain without using additional funds?



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Capital intensity ratio = 1.2
Profit margin = 10%
Dividend payout ratio = 50%
Current sales = P100, 000
Spontaneous liabilities = P10, 000

a. 3.6%
b. 4.8%
c. 5.2%
d. 6.1%
22. If the capital intensity ratio of a firm actually decreases as sales increase, use of
the percentage of sales method will typically understate the amount of additional
funds required, other things held constant.
a. True
b. False
23. A firm has the following balance sheet and statistics
Cash P10 Accounts payable P10
Accounts receivable 10 Notes payable 20
Inventories 10 Long-term debt 40
Fixed assets 90 Common stock 40
Retained earnings 10
P120 P120

Fixed assets are being used at 80 percent of capacity; sales for the year just
ended were P200; sales will increase P10 per year for the next 4 years; the profit
margin is 5 percent; and the dividend payout ratio is 60 percent. What are the
total outside financing requirements for the entire 4 years? (Assume that fixed
assets cannot be sold.)
a. P4.00
b. P2.00
c. P0.80 (surplus)
d. P14.00 (surplus)
24. Calculate the total assets of Hero Paint given the following information: Sales this
year = P3, 000; increase in sales projected for next year = 20 percent; net
income after tax this year = P250; dividend payout ratio = 40 percent; projected
excess funds available next year = P100; accounts payable = P600; notes
payable = P100; and accrued wages and taxes = P200. (Note: the company is
operating at full capacity.)
a. P3, 000
b. P2, 200
c. P2, 00
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d. P1, 200
25. A firms profit margin is 5 percent, its debt/assets ratio is 56 percent, and its
dividend payout ratio is 40 percent. If the firm is operating at less than full
capacity, then sales could increase to at least some extent without the need for
external funds, but if it is operating at full capacity with respect to all assets,
including fixed assets, then any growth in sales will require external financing.
a. True
b. False
26. Which of the following actions would reduce the firms need for external capital
(each to be considered independently, other things held constant)?
a. An increase in the dividend payout ratio
b. A decrease in the profit margin
c. A decrease in average collection period
d. An increase in expected sales growth
27. The Nelson Company has a balance sheet showing the following account
amounts as of December 31, 19x7:

Cash P10 Accounts payable P15
Accounts
receivable
40 Accruals 5
Inventory 50 Notes payable 20
Net fixed assets 100 Bonds payable 20
Common stock 20
Retained earnings 120
P200 P200

Last year (19x6) the firm generated sales of P2, 000 with a profit margin of 10
percent and a dividend payout ratio of 50 percent. It has been operating its fixed
assets at 80 percent of capacity. It expects to increase sales by P750 with a
decrease in the profit margin to 3 percent and an increase in the dividend payout
ratio to 60 percent. What needs for additional funds will Nelson have?
a. P700
b. P3.00
c. P34.50
d. P9.50
28. Any firm with a positive growth rate will require some amount of external funding.
a. True
b. False
29. Two firms were generating the same sales with the same capital intensity ratios.
However, one firm was operating below capacity. If the two firms expect the
same growth in sales in the next period, it is more likely that the firm operating at
full capacity will need additional funds, other things held constant.
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a. True
b. False
30. You are the owner of a small business which has the following balance sheet:
Current assets P5, 000 Accounts payable P1, 000
Net fixed assets 10, 000 Accruals 1, 000
Long-term debt 5, 000
Common equity 8, 000
Total assets P15, 000 Total claims P15, 000

Fixed assets are fully utilized. Next year you expect sales to increase by 50
percent. You also expect to retain P2, 000 of next years earnings within the firm.
What is next years additional funding requirement?
a. No additional funds are required
b. P3, 500
c. P4, 500
d. P5, 500
31. The percentage of sales method assumes that the key ratios are constant, which
means, for example, that if you plotted a graph of inventories versus sales, the
regression line would be linear and would have a positive Y intercept.
a. True
b. False
32. The percentage of sales forecasting method produces accurate results unless
which of the following conditions is (are) present?
a. Fixed assets are lumpy
b. Strong economies of scale are present
c. Excess capacity exists because of a temporary recession
d. A, b, and c all make the percentage of sales method inaccurate.
33. A firms financial plan must be consistent with the firms
a. Strategic plan
b. Operating plan
c. Corporate objectives
d. All of the above.
34. Pro forma financial statements are used to asses a firms historical performance.
a. True
b. False
35. The percentage of sales forecasting technique is type of simple linear regression
in which the regression line is constrained to pass through the origin.
a. True
b. False.
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UNIT XXI Suggested Answers
1. A 8. C 15. A 22. B 29. A
2. D 9. D 16. A 23. D 30. C
3. B 10. D 17. D 24. D 31. B
4. D 11. B 18. B 25. B 32. D
5. D 12. B 19. C 26. C 33. D
6. C 13. C 20. A 27. A 34. B
7. D 14. A 21. B 28. B 35. A