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Exam 11: Project Analysis and Evaluation

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Question 21

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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.

F) B) and C)
G) B) and D)

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Question 22

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The Metal Shop produces 1.8 million metal fasteners a year for industrial use. At this level of production, its total fixed costs are $378,000 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?

A) yes; The offered price is less than the marginal cost.
B) yes; The offered price is equal to the marginal cost.
C) yes; The offered price is greater than the marginal cost.
D) no; The offered price is less than the marginal cost.
E) no; The offered price is greater than the marginal cost.

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

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Question 23

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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 $750 per unit, give or take 2 percent. What is the amount of the total costs per unit under the worst case scenario?

The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 2 percent, the operating cash flow increases by 5.3 percent. What is the degree of operating leverage if the contribution margin per unit is $47?

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

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

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:

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

A company is considering a project with a cash break-even point of 22,600 units. The selling price is $28 a unit, the variable cost per unit is $13, and depreciation is $14,000. What is the projected amount of fixed costs?

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

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?

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?

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:

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:

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

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 $750 per unit, give or take 2 percent. The tax rate is 35 percent. The company is conducting a sensitivity analysis with fixed costs of $590,000. What is the OCF given this analysis?

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

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 $750 per unit, plus or minus 2 percent. What is the sales revenue under the worst case scenario?

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