Test bank corporate finance 8e ros chap011

SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS... SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS... I, III, and IV only SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPT

Multiple Choice Questions

1 Forecasting risk is defined as the:

a possibility that some proposed projects will be rejected

b process of estimating future cash flows relative to a project

C possibility that errors in projected cash flows will lead to incorrect decisions.

d process of ascertaining the incremental cash flows for a project

e possibility that tax rates could change over the life of a project

SECTION: 11.1

TOPIC: FORECASTING RISK

TYPE: DEFINITIONS

2 Scenario analysis is defined as:

a the determination of the most likely outcome for a project

B analyzing the changes in NPV estimates when what-if questions are posed.

c isolating the effect that one variable has on the NPV of a project

d comparing the NPV of a project both with and without considering the effects of erosion

e determining the acceptability of a project based solely on the project's operating cash flows

SECTION: 11.2

TOPIC: SCENARIO ANALYSIS

TYPE: DEFINITIONS

3 An analysis of what happens to the estimate of net present value when only one variable is changed is called _ analysis

4 An analysis which combines scenario analysis with sensitivity analysis is called _ analysis

A change in direct relationship to the quantity of output produced.

b are constant in the short-run regardless of the quantity of output produced

c reflect the change in NPV when one more unit of output is produced and sold

d are subtracted from fixed costs to compute the contribution margin

e are inversely related to the number of units sold

SECTION: 11.3

TOPIC: VARIABLE COSTS

TYPE: DEFINITIONS

6 Fixed costs:

a change as the quantity of output produced changes

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

c reflect the change in a variable 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

SECTION: 11.3

TOPIC: FIXED COSTS

TYPE: DEFINITIONS

7 The change in revenue that occurs when one more unit of output is sold is called the _ revenue

10 The sales level that results in a project's net present value exactly equaling zero is called the _ break-even

11 Operating leverage is the:

a dependence of a firm on variable costs

b percentage of a sales price that is needed to cover variable costs

c percentage of the sales price which represents the contribution margin

D degree to which a firm relies on fixed costs.

e amount of debt used to finance a project

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

14 Hard rationing is defined as the situation where:

a two projects have the same NPV but only one project can be financed

b firms are forced to chose one project over another

c divisions within a firm are granted equal amounts for capital expenditures

d divisions within a firm request more funds for capital projects than firms have available for use

E a firm is unable to raise the funds needed for a project from any source.

SECTION: 11.6

TOPIC: HARD RATIONING

TYPE: DEFINITIONS

15 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

SECTION: 11.1

TOPIC: FORECASTING RISK

TYPE: CONCEPTS

16 Jennie is fairly cautious when considering new opportunities and therefore analyzes each project to determine the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected Jennie is using:

17 Conducting scenario analysis on a proposed project helps managers determine the:

a impact that an individual variable has on the outcome of the project

b initial cost that will be required to implement the project

c actual profitable life of the project

d level of funding available for the project

E potential range of reasonable outcomes that might be realized.

SECTION: 11.2

TOPIC: SCENARIO ANALYSIS

TYPE: CONCEPTS

18 When conducting a best case scenario analysis, you should assume that:

a the number of units sold and the variable cost per unit are at the high end of their potential ranges

B the salvage value will be at the high end of its possible range.

c sales quantity will be at the low end of its range while the sales price is the highest price possible

d the variable costs per unit are at the high end of potential cost range

e fixed costs will become variable and decrease in dollar amount

SECTION: 11.2

TOPIC: SCENARIO ANALYSIS

TYPE: CONCEPTS

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

II sales price

III variable cost

IV sales quantity

a I only

b III only

c II and III only

D I and III only

e I, III, and IV only

SECTION: 11.2

TOPIC: SCENARIO ANALYSIS

TYPE: CONCEPTS

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

a optimistic sensitivity

b pessimistic sensitivity

C optimistic scenario analysis.

d pessimistic scenario analysis

e base case scenario analysis

SECTION: 11.2

TOPIC: SCENARIO ANALYSIS

TYPE: CONCEPTS

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

a The worst case scenario determines the maximum loss, in current dollars, that a firm could incur from a given project

b Scenario analysis reflects the entire range of results that can be realized from a proposed investment project

c Scenario analysis provides a clear signal to management to either accept or reject a

proposed project

D Scenario analysis provides management with a glimpse of the possible range of outcomes

that could be realized from a project

e When the base case scenario results in a positive net present value, management can be assured the proposed project will meet or exceed their expectations

SECTION: 11.2

TOPIC: SCENARIO ANALYSIS

TYPE: CONCEPTS

23 Sensitivity analysis determines the:

a range of possible outcomes given that most variables can assume a range of values

B degree to which the net present value reacts to changes in a single variable.

c extent of the range of net present values that can be realized from a proposed project

d degree to which a project is reliant upon the fixed costs

e ideal ratio of variable costs to fixed costs for profit maximization

SECTION: 11.2

TOPIC: SENSITIVITY ANALYSIS

TYPE: CONCEPTS

24 Assume you graph the changes in net present value against the changes in the value of a single variable used in a project The steepness of the resulting function illustrates the:

a degree of operating leverage within the project

b trade-off of variable versus fixed costs utilized by the project

c range of total outcomes possible from accepting a proposed project

d contribution margin of the project at various levels of output

E degree of sensitivity of the project's outcome to changes in the single variable.

SECTION: 11.2

TOPIC: SENSITIVITY ANALYSIS

TYPE: CONCEPTS

25 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 profit margin of the project

e less volatile the project's outcome

SECTION: 11.2

TOPIC: SENSITIVITY ANALYSIS

TYPE: CONCEPTS

26 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

SECTION: 11.2

TOPIC: SENSITIVITY ANALYSIS

TYPE: CONCEPTS

27 To ascertain whether the accuracy of a variable cost estimate for a project will have much effect on the final outcome of that project, you should conduct _ analysis

28 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

31 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 are inversely related to operating cash flow.

SECTION: 11.3

TOPIC: VARIABLE COSTS

TYPE: CONCEPTS

32 As the variable cost per unit increases, the:

A contribution margin decreases.

b number of units sold decreases

c fixed cost per unit decreases

d operating cash flow increases

e net profit increases

34 Which one of the following is a fixed cost in the short-run?

a packaging and shipping costs

b wages for a machine operator

c the cost of raw materials

d the cost of water used in the production process

E three-year lease on a delivery truck

a average variable cost

b average total cost

c average total revenue

36 The president of your firm would like to offer special sale prices to your best customers under the following terms:

The prices will apply only to units purchased in excess of those normally purchased by the customer

The units purchased must be paid for in cash at the time of sale

The total quantity sold under these terms cannot exceed the excess capacity of the firm The net profit of the firm should not be affected either positively or negatively

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

a average variable cost

b average total cost minus the marginal cost

c sensitivity value of the variable cost

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 divided by the sales price

e aftertax profit per unit divided by the sales price

SECTION: 11.3

TOPIC: CONTRIBUTION MARGIN

TYPE: CONCEPTS

a total costs.

b fixed costs

c the earnings before interest and taxes

D fixed costs plus depreciation.

e depreciation

SECTION: 11.3

TOPIC: ACCOUNTING BREAKEVEN

TYPE: CONCEPTS

39 Which of the following statements are correct concerning the accounting break-even point?

I The net income is equal to zero

II The net present value is equal to zero

III The quantity sold is equal to the total fixed costs plus depreciation divided by the contribution margin

IV The quantity sold is equal to the total fixed costs divided by the contribution margin

A I and III only

c fixed costs plus depreciation

d net income plus taxes

e the variable costs

SECTION: 11.3

TOPIC: ACCOUNTING BREAK-EVEN

TYPE: CONCEPTS

a fixed costs increase.

B depreciation expense decreases.

c contribution margin decreases

d variable costs per unit increase

e selling price per unit decreases

SECTION: 11.3

TOPIC: ACCOUNTING BREAK-EVEN

TYPE: CONCEPTS

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 equals the fixed costs

e contribution margin is zero

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

SECTION: 11.3

TOPIC: ACCOUNTING BREAK-EVEN

TYPE: CONCEPTS

a 5-year life and require an initial cash outlay of $225,000 Annual sales are estimated at

$685,000 and the tax rate is 35 percent The net present value is a negative $225,000 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.

SECTION: 11.4

TOPIC: CASH BREAK-EVEN

TYPE: CONCEPTS

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 estimated sales volume is equal to the cash break-even level of sales.

c The estimated sales volume is equal to the financial break-even level of sales

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

break-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

SECTION: 11.4

TOPIC: CASH BREAK-EVEN

TYPE: CONCEPTS

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.

SECTION: 11.4

TOPIC: CASH BREAK-EVEN

TYPE: CONCEPTS

48 The point where a project produces a rate of return equal to the required return is known

as the:

a point of zero operating leverage

b cash break-even point

c accounting break-even point

D financial break-even point.

e internal 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 III and IV only

E I, III, and IV only

SECTION: 11.4

TOPIC: FINANCIAL BREAK-EVEN

TYPE: CONCEPTS

accepted based on net present value To determine that sales level you should compute the:

a contribution margin and set that margin equal to the fixed costs

b divided the contribution margin by (1 Tax rate)

c accounting break-even point

d cash break-even point

E financial break-even point.

SECTION: 11.4

TOPIC: FINANCIAL BREAK-EVEN

TYPE: CONCEPTS

51 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.

b lower the contribution margin

c increase the initial cash outlay

d increase the fixed costs per unit while lowering the contribution margin

e lower the operating cash flow of the project

A high variable costs relative to the fixed costs

b relatively high initial cash outlay

c an OCF that is highly sensitive to the sales quantity

d high level of forecasting risk

e a DOL of five or greater

SECTION: 11.5

TOPIC: OPERATING LEVERAGE

TYPE: CONCEPTS