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Exam 11: Project Analysis and Evaluation

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Question 31

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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.

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

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Question 32

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You are in charge of a project that has a degree of operating leverage of 2.64.What will happen to the operating cash flows if the number of units you sell increase by 4 percent?

A) 15.84 percent decrease
B) 2.27 percent decrease
C) no change
D) 2.27 percent increase
E) 10.56 percent increase

F) C) and D)
G) D) and E)

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Question 33

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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 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?

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?

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?

Spencer Tools would like to offer a special product to its best customers.However,the firm wants to limit its maximum potential loss on this product to the firm's initial investment in the project.The fixed costs are estimated at $21,000,the depreciation expense is $11,000,and the contribution margin per unit is $12.50.What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?

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

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?

The CFO of Edward's Food Distributors is continually receiving capital funding requests from its division managers.These requests are seeking funding for positive net present value projects.The CFO continues to deny all funding requests due to the financial situation of the company.Apparently,the company is:

Uptown Promotions has three divisions.As part of the planning process,the CFO requested that each division submit its capital budgeting proposals for next year.These proposals represent positive net present value projects that fall within the long-range plans of the firm.The requests from the divisions are $4.2 million,$3.1 million,and $6.8 million,respectively.For the firm as a whole,the management of Uptown Promotions has limited spending to $10 million for new projects next year.This is an example of:

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

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

Your company is reviewing a project with estimated labor costs of $21.20 per unit,estimated raw material costs of $37.18 a unit,and estimated fixed costs of $20,000 a month.Sales are projected at 42,000 units over the one-year life of the project.All estimates are accurate within a range of plus or minus 4 percent.What are the total variable costs for the worst-case scenario?

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

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:

What is operating leverage and why is it important in the analysis of capital expenditure projects?

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

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:

Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life.The projections include a sales price of $38,variable cost per unit of $18.50,and fixed costs of $32,000.The operating cash flow is $19,700.What is the break-even quantity?