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Exam 11: Project Analysis and Evaluationpart Five: Risk and Return

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Question 31

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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?

A) $984,613
B) $1,267,008
C) $1,489,511
D) $1,782,409
E) $1,993,870

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

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Question 32

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Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units,plus or minus 2 percent.The expected variable cost per unit is $11 and the expected fixed costs are $287,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit,give or take 3 percent.What is the net income under the worst case scenario?

A) $8,578
B) $18,228
C) $15,846
D) $20,704
E) $24,696

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

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Question 33

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A proposed project has fixed costs of $9,800,depreciation expense of $2,550,and a sales quantity of 2,100 units.The total variable costs are $5,607.What is the contribution margin per unit if the projected level of sales is the accounting break-even point?

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?

Variable costs can be defined as the costs that:

At the accounting break-even point,the:

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?

Sensitivity analysis is based on:

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

-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?

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

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?

-Hybrid cars are touted as a "green" alternative;however,the financial aspects of hybrid ownership are not as clear.Consider a hybrid model that has a list price of $5,500 (including tax consequences) more than a comparable car with a traditional gasoline engine.Additionally,the annual ownership costs (other than fuel) for the hybrid were expected to be $420 more than the traditional model.The EPA mileage estimate is 23 mpg for the traditional model and 25 mpg for the hybrid model.Assume the appropriate interest rate is 10 percent,all cash flows occur at the end of the year,you drive 15,900 miles per year,and keep either car for 6 years.What price per gallon would make the decision to buy they hybrid worthwhile?

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.

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

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:

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 contribution margin per unit under the best case scenario?

When the operating cash flow of a project is equal to zero,the project is operating at the:

Mr.Bear,your boss,will only agree to accept a project that,as a minimum,provides a rate of return equal to the requirement he has set for the project.Given this,explain how you can use break-even analysis to ascertain which projects will be acceptable to him as you don't want to risk hearing him growl if you waste his time presenting him with a project that is unacceptable.