Orange: Financial Management - Chapter 11 Project Analysis and Evaluation

Chapter 11 Project Analysis and Evaluation

Forecasting risk is defined as the possibility that:

A.	some proposed projects will be rejected.

B.	some proposed projects will be temporarily delayed.

C.	incorrect decisions will be made due to erroneous cash flow projections.

D.	some projects will be mutually exclusive.

E.	tax rates could change over the life of a project.

Refer to section 11.1

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment.
Section: 11.1
Topic: Forecasting risk

Scenario analysis is defined as the:

A.	determination of the initial cash outlay required to implement a project.

B.	determination of changes in NPV estimates when what-if questions are posed.

C.	isolation of the effect that a single variable has on the NPV of a project.

D.	separation of a project's sunk costs from its opportunity costs.

E.	analysis of the effects that a project's terminal cash flows has on the project's NPV.

Refer to section 11.2

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment.
Section: 11.2
Topic: Scenario analysis

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

A.	forecasting

scenario

C.	sensitivity

D.	simulation

E.	break-even

Refer to section 11.2

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.

A.	forecasting

combined

complex

D.	simulation

E.	break-even

Refer to section 11.2

Variable costs can be defined as the costs that:

A.	remain constant for all time periods.

B.	remain constant over the short run.

C.	vary directly with sales.

D.	are classified as non-cash expenses.

E.	are inversely related to the number of units sold.

Refer to section 11.3

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points.
Section: 11.3
Topic: Variable costs

Fixed costs:

A.	change as a small quantity of output produced changes.

B.	are constant over the short-run regardless of the quantity of output produced.

C.	are defined as the change in total costs when one more unit of output is produced.

D.	are subtracted from sales to compute the contribution margin.

E.	can be ignored in scenario analysis since they are constant over the life of a project.

Refer to section 11.3

The change in revenue that occurs when one more unit of output is sold is referred to as:

A.	marginal revenue.

B.	average revenue.

C.	total revenue.

erosion.

E.	scenario revenue.

Refer to section 11.3

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

A.	marginal cost.

B.	average cost.

C.	total cost.

D.	scenario cost.

net cost.

Refer to section 11.3

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

A.	net present value

B.	internal rate of return

C.	contribution margin

D.	net income

E.	operating cash flow

Refer to section 11.3

10.

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

A.	net present value

B.	internal rate of return

C.	contribution margin

D.	net income

E.	operating cash flow

Refer to section 11.4

11.

Which one of the following is defined as the sales level that corresponds to a zero NPV?

A.	accounting break-even

B.	leveraged break-even

C.	marginal break-even

D.	cash break-even

E.	financial break-even

Refer to section 11.4

12.

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

A.	variable costs.

B.	fixed costs.

sales.

D.	operating cash flows.

E.	net working capital.

Refer to section 11.5

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project.
Section: 11.5
Topic: Operating leverage

13.

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

A.	degree of sensitivity

B.	degree of operating leverage

C.	accounting break-even

D.	cash break-even

E.	contribution margin

Refer to section 11.5

14.

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:

A.	financial rejection.

B.	project rejection.

C.	soft rationing.

D.	marginal rationing.

E.	capital rationing.

Refer to section 11.6

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 How capital rationing affects the ability of a company to accept projects.
Section: 11.6
Topic: Capital rationing

15.

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

A.	marginal spending.

B.	capital preservation.

C.	soft rationing.

D.	hard rationing.

E.	marginal rationing.

Refer to section 11.6

16.

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing:

A.	financial deferral.

B.	financial allocation.

C.	capital allocation.

D.	marginal rationing.

E.	hard rationing.

Refer to section 11.6

17.

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

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.

Refer to section 11.1

18.

Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is Steve using?

A.	simulation testing

B.	sensitivity analysis

C.	break-even analysis

D.	rationing analysis

E.	scenario analysis

Refer to section 11.2

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment.
Section: 11.2
Topic: Scenario analysis

19.

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

A.	determining how fixed costs affect NPV

B.	estimating the residual value of fixed assets

C.	identifying the potential range of reasonable outcomes

D.	determining the minimal level of sales required to break-even on an accounting basis

E.	determining the minimal level of sales required to break-even on a financial basis

Refer to section 11.2

20.

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

Refer to section 11.2

21.

The base case values used in scenario analysis are the ones considered the most:

A.	optimistic.

B.	desired by management.

C.	pessimistic.

D.	conducive to creating a positive net present value.

E.	likely to occur.

Refer to section 11.2

22.

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

I. fixed cost
II. sales price
III. variable cost
IV. sales quantity

I only

III only

C.	II and III only

D.	I and III only

E.	I, III, and IV only

Refer to section 11.2

23.

When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

A.	best case sensitivity analysis.

B.	worst case sensitivity analysis.

C.	best case scenario analysis.

D.	worst case scenario analysis.

E.	base case scenario analysis.

Refer to section 11.2

24.

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

A.	The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project.

B.	Scenario analysis defines the entire range of results that could be realized from a proposed investment project.

C.	Scenario analysis determines which variable has the greatest impact on a project's final outcome.

D.	Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.

E.	Management is guaranteed a positive outcome for a project when the worst case scenario produces a positive NPV.

Refer to section 11.2

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment.
Section: 11.2
Topic: Scenario analysis

25.

Sensitivity analysis determines the:

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.

Refer to section 11.2

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment.
Section: 11.2
Topic: Sensitivity analysis

26.

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function?

A.	The steepness of the function relates to the project's degree of operating leverage.

B.	The steeper the function, the less sensitive the project is to changes in the sales quantity.

C.	The resulting function will be a hyperbole.

D.	The resulting function will include only positive values.

E.	The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

Refer to section 11.2

27.

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

A.	less important the variable to the final outcome of the project.

B.	less volatile the project's net present value to that variable.

C.	greater the importance of accurately predicting the value of that variable.

D.	greater the sensitivity of the project to the other variable inputs.

E.	less volatile the project's outcome.

Refer to section 11.2

28.

Sensitivity analysis is based on:

A.	varying a single variable and measuring the resulting change in the NPV of a project.

B.	applying differing discount rates to a project's cash flows and measuring the effect on the NPV.

C.	expanding and contracting the number of years for a project to determine the optimal project length.

D.	the best, worst, and most expected situations.

E.	various states of the economy and the probability of each state occurring.

Refer to section 11.2

29.

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

leverage

risk

C.	break-even

D.	sensitivity

cash flow

Refer to section 11.2

30.

Simulation analysis is based on assigning a _____ and analyzing the results.

A.	narrow range of values to a single variable

B.	narrow range of values to multiple variables simultaneously

C.	wide range of values to a single variable

D.	wide range of values to multiple variables simultaneously

E.	single value to each of the variables

Refer to section 11.2

31.

Which one of the following types of analysis is the most complex to conduct?

scenario

B.	break-even

C.	sensitivity

D.	degree of operating leverage

E.	simulation

Refer to section 11.2

32.

Ted is analyzing a project using simulation. His focus is limited to the short-term. To ease the simulation process, he is combining expenses into various categories. Which one of the following should he include in the fixed cost category?

A.	production department payroll taxes

B.	equipment insurance

sales tax

D.	raw materials

E.	product shipping costs

Refer to section 11.2

33.

Which one of the following statements concerning variable costs is correct?

A.	Variable costs minus fixed costs equal marginal costs.

B.	Variable costs are equal to fixed costs when production is equal to zero.

C.	An increase in variable costs increases the operating cash flow.

D.	Variable costs are inversely related to fixed costs.

E.	Variable costs per unit are inversely related to the contribution margin per unit.

Refer to section 11.3

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points.
Section: 11.3
Topic: Variable costs

34.

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

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 IV

Refer to section 11.3

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points.
Section: 11.3
Topic: Variable costs

35.

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?

A.	average variable cost

B.	average total cost

C.	average total revenue

D.	marginal revenue

E.	marginal cost

Refer to section 11.3

36.

The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms:

1. The prices will apply only to units purchased in excess of the quantity normally purchased by a customer.
2. The units purchased must be paid for in cash at the time of sale.
3. The total quantity sold under these terms cannot exceed the excess capacity of the firm.
4. The net profit of the firm should not be affected.
5. The prices will be in effect for one week only.

Given these conditions, the special sale price should be set equal to the:

A.	average variable cost of materials only.

B.	average cost of all variable inputs.

C.	sensitivity value of the variable costs.

D.	marginal cost of materials only.

E.	marginal cost of all variable inputs.

Refer to section 11.3

37.

The contribution margin per unit is equal to the:

A.	sales price per unit minus the total costs per unit.

B.	variable cost per unit minus the fixed cost per unit.

C.	sales price per unit minus the variable cost per unit.

D.	pre-tax profit per unit.

E.	aftertax profit per unit.

Refer to section 11.3

38.

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

I only

III only

C.	II and III only

D.	I and IV only

E.	I, II, and III only

Refer to section 11.3

39.

An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used.

I. annual salary for the firm's president
II. contribution margin per unit
III. cost of equipment required by a project
IV. variable cost per unit

A.	I and III only

B.	I and IV only

C.	II and III only

D.	I, III, and IV only

E.	I, II, and IV only

Refer to section 11.3

AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points.
Section: 11.3
Topic: Accounting break-even

40.

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project:

A.	will never pay back.

B.	has a zero net present value.

C.	is operating at a higher level than if it were operating at its cash break-even level.

D.	is operating at a higher level than if it were operating at its financial break-even level.

E.	is lowering the total net income of the firm.

Refer to section 11.3

41.

Given the following, which feature identifies the most desirable level of output for a project?

A.	operating cash flow equal to the depreciation expense

B.	payback period equal to the project's life

C.	discounted payback period equal to the project's life

zero IRR

E.	zero operating cash flow

Refer to sections 11.3 and 11.4

42.

At the accounting break-even point, the:

A.	payback period must equal the required payback period.

B.	NPV is zero.

C.	IRR is zero.

D.	contribution margin per unit equals the fixed costs per unit.

E.	contribution margin per unit is zero.

Refer to section 11.3

43.

A project has a payback period that exactly equals the project's life. The project is operating at:

A.	its maximum capacity.

B.	the financial break-even point.

C.	the cash break-even point.

D.	the accounting break-even point.

E.	a zero level of output.

Refer to section 11.3

44.

Valerie just completed analyzing a project. Her analysis indicates that the project will have a 6-year life and require an initial cash outlay of $320,000. Annual sales are estimated at $589,000 and the tax rate is 34 percent. The net present value is a negative $320,000. Based on this analysis, the project is expected to operate at the:

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.

Refer to section 11.4

45.

A project has a projected IRR of negative 100 percent. Which one of the following statements must also be true concerning this project?

A.	The discounted payback period equals the life of the project.

B.	The operating cash flow is positive and equal to the depreciation.

C.	The net present value of the project is negative and equal to the initial investment.

D.	The payback period is exactly equal to the life of the project.

E.	The net present value of the project is equal to zero.

Refer to section 11.4

46.

Which of the following characteristics relate to the cash break-even point for a given project?

I. The project never pays back.
II. The IRR equals the required rate of return.
III. The NPV is negative and equal to the initial cash outlay.
IV. The operating cash flow is equal to the depreciation expense.

A.	I and III only

B.	II and IV only

C.	I, II, and III only

D.	II, III, and IV only

E.	I, II, III, and IV

Refer to section 11.4

47.

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

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.

Refer to section 11.4

48.

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?

A.	capital break-even

B.	cash break-even

C.	accounting break-even

D.	financial break-even

E.	internal break-even

Refer to section 11.4

49.

Which of the following statements are identified with financial break-even point?

I. The present value of the cash inflows exactly offsets the initial cash outflow.
II. The payback period is equal to the life of the project.
III. The NPV is zero.
IV. The discounted payback period equals the life of the project.

A.	I and II only

B.	I and III only

C.	II and IV only

D.	I, II, and III only

E.	I, III, and IV only

Refer to section 11.4

50.

You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:

A.	contribution margin per unit and set that margin equal to the fixed costs per unit.

B.	contribution margin per unit.

C.	accounting break-even point.

D.	cash break-even point.

E.	financial break-even point.

Refer to section 11.4

51.

Theresa is analyzing a project that currently has a projected NPV of zero. Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently.

I. increase the quantity sold
II. decrease the fixed leasing cost for equipment
III. decrease the labor hours needed to produce one unit
IV. increase the sales price

A.	I and II only

B.	I and IV only

C.	II, III, and IV only

D.	I, II, and IV only

E.	I, II, III, and IV

Refer to section 11.4

Orange

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Tuesday, November 1, 2016

Financial Management - Chapter 11 Project Analysis and Evaluation

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