Finance Chapter 11

1. Forecasting risk is defined as the possibility that: C. incorrect decisions will be made due to erroneous cash flow projections.
2. Scenario analysis is defined as the: B. determination of changes in NPV estimates when what-if questions are posed.
3. An analysis of the change in a project’s NPV when a single variable is changed is called _____ analysis. C. sensitivity
4. An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. D. simulation
5. Variable costs can be defined as the costs that: C. vary directly with sales.
6. Fixed costs: B. are constant over the short-run regardless of the quantity of output produced.
7. The change in revenue that occurs when one more unit of output is sold is referred to as: A. marginal revenue.
8. The change in variable costs that occurs when production is increased by one unit is referred to as the: A. marginal cost.
9. By definition, which one of the following must equal zero at the accounting break-even point? D. net income
10. By definition, which one of the following must equal zero at the cash break-even point? E. operating cash flow
11. Which one of the following is defined as the sales level that corresponds to a zero NPV? E. financial break-even
12. Operating leverage is the degree of dependence a firm places on its: B. fixed costs.
13. Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? B. degree of operating leverage
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: E. capital rationing.
15. The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: C. soft rationing.
16. PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances. This firm is facing: E. hard rationing.
17. Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: D. accuracy of the projected cash flows.
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? E. scenario analysis
19. Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? C. identifying the potential range of reasonable outcomes
20. Which one of the following will be used in the computation of the best-case analysis of a proposed project? D. the lowest variable cost per unit that can reasonably be expected
21. The base case values used in scenario analysis are the ones considered the most: E. likely to occur.
22. Which of the following variables will be at their highest expected level under a worst case scenario?I. fixed costII. sales priceIII. variable costIV. sales quantity D. I and III only
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: D. worst case scenario analysis.
24. Which one of the following statements concerning scenario analysis is correct? D. Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.
25. Sensitivity analysis determines the: B. degree to which the net present value reacts to changes in a single variable.
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? E. The slope of the function measures the sensitivity of the net present value to a change in sales quantity.
27. As the degree of sensitivity of a project to a single variable rises, the: C. greater the importance of accurately predicting the value of that variable.
28. Sensitivity analysis is based on: A. varying a single variable and measuring the resulting change in the NPV of a project.
29. Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? D. sensitivity
30. Simulation analysis is based on assigning a _____ and analyzing the results. D. wide range of values to multiple variables simultaneously
31. Which one of the following types of analysis is the most complex to conduct? E. simulation
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? B. equipment insurance
33. Which one of the following statements concerning variable costs is correct? E. Variable costs per unit are inversely related to the contribution margin per unit.
34. Which of the following are inversely related to variable costs per unit?I. contribution margin per unitII. number of units soldIII. operating cash flow per unitIV. net profit per unit D. I, III, and IV only
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? E. marginal cost
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. E. marginal cost of all variable inputs.
37. The contribution margin per unit is equal to the: C. sales price per unit minus the variable cost per unit.
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 flowII. internal rate of returnIII. net incomeIV. payback period C. II and III only
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 presidentII. contribution margin per unitIII. cost of equipment required by a projectIV. variable cost per unit D. I, III, and IV only
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: C. is operating at a higher level than if it were operating at its cash break-even level.
41. Given the following, which feature identifies the most desirable level of output for a project? C. discounted payback period equal to the project’s life
42. At the accounting break-even point, the: C. IRR is zero.
43. A project has a payback period that exactly equals the project’s life. The project is operating at: D. the accounting break-even point.
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: E. cash break-even point.
45. A project has a projected IRR of negative 100 percent. Which one of the following statements must also be true concerning this project? C. The net present value of the project is negative and equal to the initial investment.
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
47. When the operating cash flow of a project is equal to zero, the project is operating at the: E. cash break-even point.
48. Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement? D. financial break-even
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. E. I, III, and IV only
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: E. financial break-even point.
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 soldII. decrease the fixed leasing cost for equipmentIII. decrease the labor hours needed to produce one unitIV. increase the sales price E. I, II, III, and IV
52. You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could: A. lower the degree of operating leverage.
53. Which one of the following characteristics best describes a project that has a low degree of operating leverage? A. high variable costs relative to the fixed costs
54. Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? B. subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
55. The degree of operating leverage is equal to: C. 1 + FC/OCF.
56. 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, Uptown Promotions is limited to spending $10 million for new projects next year. This is an example of: D. soft rationing.
57. Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions. All requests represent positive net present value projects. All projects are independent. Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests. Management is following a practice known as: E. soft rationing.
58. 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: C. facing hard rationing.

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