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Exam 11: Some Lessons From Recent Capital Market History

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Question 21

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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

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

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Question 22

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The degree of operating leverage is equal to:

A) the percentage change in quantity divided by the percentage change in OCF.
B) the percentage change in sales divided by the percentage change in OCF.
C) 1 + FC/OCF.
D) 1 + VC/OCF.
E) 1 - (FC + VC) /OCF.

F) A) and E)
G) A) and C)

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Question 23

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

Precise Machinery is analyzing a proposed project.The company expects to sell 2,250 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 3 percent range.The depreciation expense is $129,000.The sales price is estimated at $750 per unit, give or take 2 percent.What is the amount of the total costs per unit under the worst case scenario?

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

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

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

The Metal Shop produces 1.8 million metal fasteners a year for industrial use.At this level of production, its total fixed costs are $320,000 and its total costs are $522,000.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 $0.10.Should the firm sell the additional units at the offered price? Why or why not?

At the accounting break-even point, the:

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:

We are evaluating a project that costs $854,000, has a 15-year life, and has no salvage value.Assume that depreciation is straight-line to zero over the life of the project.Sales are projected at 154,000 units per year.Price per unit is $41, variable cost per unit is $20, and fixed costs are $865,102 per year.The tax rate is 33 percent, and we require a 14 percent return on this project.Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±14 percent.What is the worst-case NPV?

At an output level of 50,000 units, you calculate that the degree of operating leverage is 1.8.What will be the percentage change in operating cash flow if the new output level is 54,500 units?

Precise Machinery is analyzing a proposed project.The company expects to sell 2,100 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 4 percent range.The depreciation expense is $129,000.The sales price is estimated at $775 per unit, give or take 2 percent.The tax rate is 34 percent.The company is conducting a sensitivity analysis with fixed costs of $590,000.What is the OCF given this analysis?

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.

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

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

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?

Wexford Industrial Supply is considering a new project with estimated depreciation of $26,000, fixed costs of $79,000, and total sales of $187,000.The variable costs per unit are estimated at $11.80.What is the accounting break-even level of production?

Consider a project with the following data: accounting break-even quantity = 29,000 units; cash break-even quantity = 16,250 units; life = 10 years; fixed costs = $203,000; variable costs = $24 per unit; required return = 14 percent; depreciation = straight line.Ignoring the effect of taxes, what is the financial break-even quantity?

You are considering a new product launch.The project will cost $630,000, have a 5-year life, and have no salvage value; depreciation is straight-line to zero.Sales are projected at 160 units per year, price per unit will be $24,000, variable cost per unit will be $12,000, and fixed costs will be $283,000 per year.The required return is 12 percent and the relevant tax rate is 34 percent.Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within ±9 percent.What is the worst case NPV?