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Exam 11: Project Analysis and Evaluation

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Question 31

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Consider a 5-year project with an initial fixed asset investment of $324,000, straight-line depreciation to zero over the project's life, a zero salvage value, a selling price of $34, variable costs of $17, fixed costs of $189,700, a sales quantity of 94,000 units, and a tax rate of 21 percent. What is the sensitivity of OCF to changes in the sales price?

A) $74,260 per $1 of sales
B) $61,600 per $1 of sales
C) $78,700 per $1 of sales
D) $59,470 per $1 of sales
E) $68,850 per $1 of sales

F) A) and E)
G) B) and D)

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Question 32

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Which one of the following will be used in the computation of the best-case analysis of a proposed project?

A) Minimal number of units that are expected to be produced and sold
B) The lowest expected salvage value that can be obtained for a project's fixed assets
C) The most anticipated sales price per unit
D) The lowest variable cost per unit that can reasonably be expected
E) The highest level of fixed costs that is actually anticipated

F) C) and D)
G) A) and B)

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Question 33

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Which of the following variables will be forecast at their highest expected level under a best-case scenario?

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

Stellar Plastics is analyzing a proposed project with annual depreciation of $28,750 and a tax rate of 23 percent. The company expects to sell 16,500 units, ±3 percent. The expected variable cost per unit is $1.87, ±1 percent, and the expected fixed costs are $24,900, ±1 percent. The sales price is estimated at $7.99 a unit, ±2 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $26,000?

Operating leverage is the degree of dependence a firm places on its:

The Metal Shop produces 1.7 million metal fasteners a year for industrial use. At this level of production, its total fixed costs are $486,000 and its total costs are $791,000. The firm can increase its production by 5 percent, without increasing either its total fixed costs or its variable costs per unit. A customer has made a one-time offer for an additional 50,000 units at a price per unit of $.165. Should the firm sell the additional units at the offered price? Why or why not?

Precise Machinery is analyzing a proposed project. The company expects to sell 7,500 units, ±10 percent. The expected variable cost per unit is $314 and the expected fixed costs are $647,000. Cost estimates are considered accurate within a ±4 percent range. The depreciation expense is $187,000. The sales price is estimated at $849 per unit, give or take 2 percent. The tax rate is 21 percent. The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $850. What is the operating cash flow based on this analysis?

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

You are considering a project and are concerned about the reliability of the cash flow forecasts. To reduce any potentially harmful results from accepting this project, you should consider:

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

Bell Weather Goods has several proposed independent projects that have positive NPVs. However, the firm cannot initiate any of the projects due to a lack of financing. This situation is referred to as:

Which of the following values will be equal to zero when a firm is operating at the accounting break-even level of output?

Precise Machinery is analyzing a proposed project that is expected to sell 1,450 units, ±3 percent. The expected variable cost per unit is $139 and the expected fixed costs are $123,000. Cost estimates are considered accurate within a ±1 percent range. The depreciation expense is $39,000. The sales price is estimated at $349 per unit, ±3 percent. What is the contribution margin per unit under the best-case scenario?

Which one of these is most associated with an IRR of negative 100 percent?

Assume a project has a discounted payback that equals the project's life. The project's sales quantity must be at which one of these break-even points?

The accounting break-even production quantity for a project is 18,311 units. The fixed costs are $148,400 and the contribution margin per unit is $13.10. The fixed assets required for the project will be depreciated on straight-line basis to zero over the project's 4-year life. What is the amount of fixed assets required for this project?

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

A project that has a payback period exactly equal to the project's life is operating at: