Question 1

Which one of the following statements is true concerning operating leverage?

Accepted Answer

A)   The higher the degree of operating leverage, the greater the impact of forecasting risk.
B)   Firms with low operating leverage are said to be capital intensive.
C)   The degree of operating leverage is equal to [1 + (OCF/F
C)  ].
D)   The degree of operating leverage is equal to the percent change in quantity divided by the percent change in operating cash flow.
E)   Operating leverage increases as the output quantity rises.F) A) and B)
G) All of the above

Question 2

A project has the following estimated data: price = $200 per unit; variable costs = $150 per unit; fixed costs = $400,000; required return = 9%; initial investment = $1,500,000; $200,000 salvage value; life = 15 years. What is the financial break-even quantity?

Accepted Answer

A)   9,586 units.
B)   10,086 units.
C)   10,586 units.
D)   11,086 units.
E)   11,586 units.F) A) and E)
G) A) and B)

Question 3

Assume that you graph the changes in net present value against the changes in the value of a single variable used in a project. The steepness of the resulting function illustrates the:

Accepted Answer

A)   Degree of operating leverage within the project.
B)   Trade-off of variable versus fixed costs utilized by the project.
C)   Range of total outcomes possible from accepting a proposed project.
D)   Contribution margin of the project at various levels of output.
E)   Degree of sensitivity of a project's outcome to a single variable of the project.F) All of the above
G) C) and E)

Question 4

What is the contribution margin for a sensitivity analysis using a variable cost per unit of $9?

Accepted Answer

A)   $3
B)   $4
C)   $7
D)   $9
E)   $13F) C) and D)
G) A) and D)

Question 5

A farmer near Medicine Hat hires a grain harvesting crew from Saskatchewan to harvest his wheat at the end of each summer. Because the crop yield varies from year to year, the crew charges the farmer according to the number of bushels actually harvested each year. For capital budgeting purposes, the harvesting charges should be classified as

Accepted Answer

A)   A fixed cost since they must be paid each year.
B)   A fixed cost since the crew will be paid regardless of whether or not the crop is harvested.
C)   A variable cost since, if the crop yield is zero bushels, the crew receives no payment.
D)   A combination of fixed and variable cost, the variable portion of which is based on forecast bushels harvested.
E)   A variable cost only if the crop yield is poor in a given year.F) B) and C)
G) A) and E)

Question 6

Provide a definition for the term scenario analysis.

Accepted Answer

The determination of...

Question 7

If a division of a firm faces soft rationing, it is unlikely more capital can be obtained from the firm if the division finds a worthwhile positive NPV project.

Accepted Answer

A) True 
 B)False

Question 8

Which one of the following statements about costs is correct?

Accepted Answer

A)   Total costs will decrease as the variable cost per unit increases, all else held constant.
B)   A decrease in total fixed costs will increase the net present value of a project, all else held constant.
C)   An increase in the variable cost per unit will increase the contribution margin, all else held constant.
D)   Total costs will be greater under the best-case scenario than under the base-case scenario.
E)   The higher the total costs, the larger the net present value of a project.F) B) and C)
G) B) and E)

Question 9

A firm is considering a project with a cash break-even point of 8,100 units. The selling price is $12.50 a unit and the variable cost per unit is $6.25. What is the amount of the total fixed costs?

Accepted Answer

A)   $49,375
B)   $49,875
C)   $50,625
D)   $51,125
E)   $51,938F) A) and B)
G) C) and D)

Question 10

BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per unit sold is $10. Fixed costs are $30,000 per year.

In addition to the BASIC INFORMATION, you expect the number of units sold to be 7,000 with an upper bound of 8,000 and a lower bound of 6,000, and you expect the variable cost per unit to be $10 per unit with an upper bound of $12.50 and a lower bound of $7.50. Assuming a tax rate of 30%, compute the IRR for the BEST case. Note that salvage is $0, and NWC is $0.

Accepted Answer

A)   5%
B)   12%
C)   17%
D)   34%
E)   74%F) D) and E)
G) C) and E)

Question 11

Magellen Industries is analyzing a new project. The data they have gathered to date is as follows:  Initial requirement for equipment: $120,000
Depreciation: Straight-line to zero over the four-year life of the project with no salvage value.
Required rate of return: 15%
Marginal tax rate: 35%
What is the net income under the worst-case scenario?

Accepted Answer

A)   -$11,575
B)   -$7,524
C)   $1,316
D)   $4,051
E)   $7,524F) All of the above
G) C) and D)

Question 12

A project that has a payback period exactly equal to its life is a project that is operating at its:

Accepted Answer

A)   Cash break-even point.
B)   Incremental maximum level of sales.
C)   Financial break-even point.
D)   Accounting break-even point.
E)   Base case level of sales.F) A) and E)
G) None of the above

Question 13

Provide a definition for the term managerial options or real options.

Accepted Answer

Opportunities that m...

Question 14

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

Accepted Answer

A)   Lower the degree of operating leverage.
B)   Lower the contribution margin.
C)   Increase the initial cash outlay.
D)   Increase the fixed costs per unit while lowering the contribution margin.
E)   Lower the operating cash flow of the project.F) C) and D)
G) A) and E)

Question 15

Projected sales is generally least subject to forecasting risk.

Accepted Answer

A) True 
 B)False

Question 16

Provide a definition for the term accounting break-even.

Accepted Answer

The sales level that...

Question 17

As additional equipment is purchased, the level of fixed costs tends to _____ and the degree of operating leverage tends to _____

Accepted Answer

A)   Remain constant; remain constant.
B)   Rise; rise.
C)   Rise; fall.
D)   Fall; rise.
E)   Fall; fall.F) All of the above
G) A) and C)

Question 18

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

Accepted Answer

A)   Lower the forecasting risk of the project.
B)   Smaller the range of possible outcomes given a pre-defined range of values for the input.
C)   More attention management should place on accurately forecasting the future value of that variable.
D)   Lower the maximum potential value of the project.
E)   Lower the maximum potential loss of the project.F) C) and D)
G) B) and D)

Question 19

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

Accepted Answer

A)   Under the best-case scenario, total costs will be at their anticipated minimal level.
B)   Under the worst-case scenario, fixed costs will be at the minimal expected level.
C)   Under the base case scenario, sales will be at the highest level that is reasonably expected.
D)   Using scenario analysis, you can determine the forecast risk associated with sales.
E)   Scenario analysis concentrates on the changes in net income as variables move within reasonably expected ranges.F) A) and C)
G) C) and D)

Question 20

Which of the following does NOT require finding the point where NPV = 0?

Accepted Answer

A)   Calculating IRR.
B)   Setting a bid price.
C)   Determining the point where a firm is indifferent between accepting or rejecting a project.
D)   Finding the financial break-even point.
E)   Finding the EAC.F) A) and E)
G) C) and E)

Exam 11: Project Analysis and Evaluation

As additional equipment is purchased, the level of fixed costs tends to _ and the degree of operating leverage tends to _

Correct Answer
verified

Which one of the following statements is true concerning operating leverage?

Correct Answer
verified

Correct Answer
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A project that has a payback period exactly equal to its life is a project that is operating at its:

Correct Answer
verified

Which of the following does NOT require finding the point where NPV = 0?

Correct Answer
verified

What is the contribution margin for a sensitivity analysis using a variable cost per unit of $9?

Correct Answer
verified

Which one of the following statements about costs is correct?

Correct Answer
verified

A firm is considering a project with a cash break-even point of 8,100 units. The selling price is $12.50 a unit and the variable cost per unit is $6.25. What is the amount of the total fixed costs?

Correct Answer
verified

Provide a definition for the term accounting break-even.

Correct Answer
verified
The sales level that...
View Answer

Correct Answer
verified

Correct Answer
verified

A project has the following estimated data: price = $200 per unit; variable costs = $150 per unit; fixed costs = $400,000; required return = 9%; initial investment = $1,500,000; $200,000 salvage value; life = 15 years. What is the financial break-even quantity?

Correct Answer
verified

If a division of a firm faces soft rationing, it is unlikely more capital can be obtained from the firm if the division finds a worthwhile positive NPV project.

Correct Answer
verified

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

Correct Answer
verified

Provide a definition for the term managerial options or real options.

Correct Answer
verified
Opportunities that m...
View Answer

Projected sales is generally least subject to forecasting risk.

Correct Answer
verified

Assume that you graph the changes in net present value against the changes in the value of a single variable used in a project. The steepness of the resulting function illustrates the:

Correct Answer
verified

Provide a definition for the term scenario analysis.

Correct Answer
verified
The determination of...
View Answer

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

Correct Answer
verified

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

Correct Answer
verified

Exam 11: Project Analysis and Evaluation

As additional equipment is purchased, the level of fixed costs tends to _____ and the degree of operating leverage tends to _____

Correct AnswerverifiedShow Answer

Which one of the following statements is true concerning operating leverage?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A project that has a payback period exactly equal to its life is a project that is operating at its:

Correct AnswerverifiedShow Answer

Which of the following does NOT require finding the point where NPV = 0?

Correct AnswerverifiedShow Answer

What is the contribution margin for a sensitivity analysis using a variable cost per unit of $9?

Correct AnswerverifiedShow Answer

Which one of the following statements about costs is correct?

Correct AnswerverifiedShow Answer

A firm is considering a project with a cash break-even point of 8,100 units. The selling price is $12.50 a unit and the variable cost per unit is $6.25. What is the amount of the total fixed costs?

Correct AnswerverifiedShow Answer

Provide a definition for the term accounting break-even.

Correct AnswerverifiedThe sales level that...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A project has the following estimated data: price = $200 per unit; variable costs = $150 per unit; fixed costs = $400,000; required return = 9%; initial investment = $1,500,000; $200,000 salvage value; life = 15 years. What is the financial break-even quantity?

Correct AnswerverifiedShow Answer

If a division of a firm faces soft rationing, it is unlikely more capital can be obtained from the firm if the division finds a worthwhile positive NPV project.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Provide a definition for the term managerial options or real options.

Correct AnswerverifiedOpportunities that m...View AnswerShow Answer

Projected sales is generally least subject to forecasting risk.

Correct AnswerverifiedShow Answer

Assume that you graph the changes in net present value against the changes in the value of a single variable used in a project. The steepness of the resulting function illustrates the:

Correct AnswerverifiedShow Answer

Provide a definition for the term scenario analysis.

Correct AnswerverifiedThe determination of...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

As additional equipment is purchased, the level of fixed costs tends to _ and the degree of operating leverage tends to _

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The sales level that...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Opportunities that m...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The determination of...
View Answer

Correct Answer
verified

Correct Answer
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