Question 1

A proposed project has fixed costs of $36,000 per year. The operating cash flow at 18,000 units is $67,000. What will be the new degree of operating leverage if the number of units sold rises to 18,500?

Accepted Answer

A)  1.46
B)  1.52
C)  1.67
D)  2.08
E)  2.14F) A) and B)
G) All of the above

Question 2

When the operating cash flow of a project is equal to zero, the project is operating at the:

Accepted Answer

A)  maximum possible level of production.
B)  minimum possible level of production.
C)  financial break-even point.
D)  accounting break-even point.
E)  cash break-even point.F) B) and C)
G) A) and E)

Question 3

Cantor's has been busy analyzing a new product. Thus far, management has determined that an OCF of $218,200 will result in a zero net present value for the project, which is the minimum requirement for project acceptance. The fixed costs are $329,000 and the contribution margin per unit is $216.40. The company feels that it can realistically capture 2.5 percent of the 110,000 unit market for this product. The tax rate is 34 percent and the required rate of return is 11 percent. Should the company develop the new product? Why or why not?

Accepted Answer

A)  Yes; The project's expected IRR exceeds the required rate of return.
B)  Yes; The expected level of sales exceeds the required level of production.
C)  No; The required level of production exceeds the expected level of sales.
D)  No; The IRR is less than the required rate of return.
E)  No; The project will never payback on a discounted basis.F) None of the above
G) A) and B)

Question 4

A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units. All estimates are accurate within a plus/minus range of 3 percent. Depreciation is $12,000. What is the base case variable cost per unit?

Accepted Answer

A)  $22.16
B)  $23.84
C)  $24.09
D)  $24.23
E)  $25.18F) C) and E)
G) A) and D)

Question 5

Which of the following are inversely related to variable costs per unit?
I. contribution margin per unit
II. number of units sold
III. operating cash flow per unit
IV. net profit per unit

Accepted Answer

A)  I and II only
B)  III and IV only
C)  II, III, and IV only
D)  I, III, and IV only
E)  I, II, III, and IVF) None of the above
G) C) and D)

Question 6

What is forecasting risk and why is it important to the analysis of capital expenditure projects?
 What methods can be used to reduce this risk?

Accepted Answer

Forecasting risk is the possibility that...

Question 7

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale?

Accepted Answer

A)  average variable cost
B)  average total cost
C)  average total revenue
D)  marginal revenue
E)  marginal costF) B) and C)
G) A) and E)

Question 8

A project has a unit price of $5,000, a variable cost per unit of $4,000, fixed costs of $17,000,000, and depreciation expense of $6,970,000. What is the accounting break-even quantity?

Accepted Answer

A)  6,970 units
B)  10,030 units
C)  17,000 units
D)  21,470 units
E)  23,970 unitsF) A) and B)
G) B) and E)

Question 9

The change in variable costs that occurs when production is increased by one unit is referred to as the:

Accepted Answer

A)  marginal cost.
B)  average cost.
C)  total cost.
D)  scenario cost.
E)  net cost.F) A) and D)
G) B) and E)

Question 10

The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $28 per unit. How many units must the firm sell to break-even on a cash basis?

Accepted Answer

A)  6,521 units
B)  7,030 units
C)  7,510 units
D)  9,667 units
E)  10,842 unitsF) All of the above
G) D) and E)

Question 11

At a production level of 4,500 units, a project has total costs of $108,000. The variable cost per unit is $11.20. Assume the firm can increase production by 1,000 units without increasing its fixed costs. What will the total costs be if 4,800 units are produced?

Accepted Answer

A)  $102,780
B)  $104,640
C)  $106,400
D)  $108,000
E)  $111,360F) A) and C)
G) A) and D)

Question 12

By definition, which one of the following must equal zero at the accounting break-even point?

Accepted Answer

A)  net present value
B)  internal rate of return
C)  contribution margin
D)  net income
E)  operating cash flowF) A) and B)
G) A) and E)

Question 13

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

Accepted Answer

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 anticipatedF) C) and D)
G) B) and E)

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 per unit.
C)  increase the initial cash outlay.
D)  increase the fixed costs per unit while lowering the contribution margin per unit.
E)  lower the operating cash flow of the project.F) All of the above
G) A) and B)

Question 15

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

Accepted Answer

A)  method of analysis used to make the decision.
B)  initial cash outflow.
C)  ability to recoup any investment in net working capital.
D)  accuracy of the projected cash flows.
E)  length of the project.F) A) and B)
G) None of the above

Question 16

Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output?
I. operating cash flow
II. internal rate of return
III. net income
IV. payback period

Accepted Answer

A)  I only
B)  III only
C)  II and III only
D)  I and IV only
E)  I, II, and III onlyF) C) and E)
G) C) and D)

Question 17

Assume that a country experiences a financial crisis that causes the nation's financial markets to freeze in a manner that prevents a private firm from raising capital from any source. Explain how project analysis conducted by that firm would work in this situation.

Accepted Answer

This situation is known as hard rationin...

Question 18

Sensitivity analysis determines the:

Accepted Answer

A)  range of possible outcomes given that most variables are reliable only within a stated range.
B)  degree to which the net present value reacts to changes in a single variable.
C)  net present value range that can be realized from a proposed project.
D)  degree to which a project relies on its fixed costs.
E)  ideal ratio of variable costs to fixed costs for profit maximization.F) B) and E)
G) A) and B)

Question 19

A project has the following estimated data: price = $74 per unit; variable costs = $39.22 per unit; fixed costs = $6,500; required return = 8 percent; initial investment = $8,000; life = 4 years. Ignore the effect of taxes. What is the degree of operating leverage at the financial break-even level of output?

Accepted Answer

A)  2.716
B)  3.691
C)  4.528
D)  6.003
E)  7.337F) B) and C)
G) A) and C)

Question 20

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

Accepted Answer

A)  degree of sensitivity
B)  degree of operating leverage
C)  accounting break-even
D)  cash break-even
E)  contribution marginF) A) and E)
G) A) and D)

Exam 11: Project Analysis and Evaluation

Assume that a country experiences a financial crisis that causes the nation's financial markets to freeze in a manner that prevents a private firm from raising capital from any source. Explain how project analysis conducted by that firm would work in this situation.

Correct Answer
verified
This situation is known as hard rationin...
View Answer

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

Correct Answer
verified

What is forecasting risk and why is it important to the analysis of capital expenditure projects? What methods can be used to reduce this risk?

Correct Answer
verified
Forecasting risk is the possibility that...
View Answer

Sensitivity analysis determines the:

Correct Answer
verified

Correct Answer
verified

A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units. All estimates are accurate within a plus/minus range of 3 percent. Depreciation is $12,000. What is the base case variable cost per unit?

Correct Answer
verified

Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I. operating cash flow II. internal rate of return III. net income IV. payback period

Correct Answer
verified

Correct Answer
verified

When the operating cash flow of a project is equal to zero, the project is operating at the:

Correct Answer
verified

Correct Answer
verified

The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $28 per unit. How many units must the firm sell to break-even on a cash basis?

Correct Answer
verified

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

Correct Answer
verified

Which of the following are inversely related to variable costs per unit? I. contribution margin per unit II. number of units sold III. operating cash flow per unit IV. net profit per unit

Correct Answer
verified

The change in variable costs that occurs when production is increased by one unit is referred to as the:

Correct Answer
verified

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

Correct Answer
verified

A proposed project has fixed costs of $36,000 per year. The operating cash flow at 18,000 units is $67,000. What will be the new degree of operating leverage if the number of units sold rises to 18,500?

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

At a production level of 4,500 units, a project has total costs of $108,000. The variable cost per unit is $11.20. Assume the firm can increase production by 1,000 units without increasing its fixed costs. What will the total costs be if 4,800 units are produced?

Correct Answer
verified

By definition, which one of the following must equal zero at the accounting break-even point?

Correct Answer
verified

A project has a unit price of $5,000, a variable cost per unit of $4,000, fixed costs of $17,000,000, and depreciation expense of $6,970,000. What is the accounting break-even quantity?

Correct Answer
verified

Exam 11: Project Analysis and Evaluation

Assume that a country experiences a financial crisis that causes the nation's financial markets to freeze in a manner that prevents a private firm from raising capital from any source. Explain how project analysis conducted by that firm would work in this situation.

Correct AnswerverifiedThis situation is known as hard rationin...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

What is forecasting risk and why is it important to the analysis of capital expenditure projects? What methods can be used to reduce this risk?

Correct AnswerverifiedForecasting risk is the possibility that...View AnswerShow Answer

Sensitivity analysis determines the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units. All estimates are accurate within a plus/minus range of 3 percent. Depreciation is $12,000. What is the base case variable cost per unit?

Correct AnswerverifiedShow Answer

Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I. operating cash flow II. internal rate of return III. net income IV. payback period

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When the operating cash flow of a project is equal to zero, the project is operating at the:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $28 per unit. How many units must the firm sell to break-even on a cash basis?

Correct AnswerverifiedShow Answer

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

Correct AnswerverifiedShow Answer

Which of the following are inversely related to variable costs per unit? I. contribution margin per unit II. number of units sold III. operating cash flow per unit IV. net profit per unit

Correct AnswerverifiedShow Answer

The change in variable costs that occurs when production is increased by one unit is referred to as the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A proposed project has fixed costs of $36,000 per year. The operating cash flow at 18,000 units is $67,000. What will be the new degree of operating leverage if the number of units sold rises to 18,500?

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

At a production level of 4,500 units, a project has total costs of $108,000. The variable cost per unit is $11.20. Assume the firm can increase production by 1,000 units without increasing its fixed costs. What will the total costs be if 4,800 units are produced?

Correct AnswerverifiedShow Answer

By definition, which one of the following must equal zero at the accounting break-even point?

Correct AnswerverifiedShow Answer

A project has a unit price of $5,000, a variable cost per unit of $4,000, fixed costs of $17,000,000, and depreciation expense of $6,970,000. What is the accounting break-even quantity?

Correct AnswerverifiedShow Answer

Correct Answer
verified
This situation is known as hard rationin...
View Answer

Correct Answer
verified

Correct Answer
verified
Forecasting risk is the possibility that...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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