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

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Question 51

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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:

A) contribution margin per unit and set that margin equal to the fixed costs per unit.
B) contribution margin per unit.
C) accounting break-even point.
D) cash break-even point.
E) financial break-even point.

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

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Question 52

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

A) determining how fixed costs affect NPV
B) estimating the residual value of fixed assets
C) identifying the potential range of reasonable outcomes
D) determining the minimal level of sales required to break-even on an accounting basis
E) determining the minimal level of sales required to break-even on a financial basis

F) All of the above
G) B) and D)

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Question 53

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At the accounting break-even point,Swiss Mountain Gear sells 14,600 ski masks at a price of $12 each.At this level of production,the depreciation is $58,000 and the variable cost per unit is $4.What is the amount of the fixed costs at this production level?

The Coffee Express has computed its fixed costs to be $0.34 for every cup of coffee it sells given annual sales of 212,000 cups.The sales price is $1.49 per cup while the variable cost per cup is $0.63.How many cups of coffee must it sell to break-even on a cash basis?

Which one of the following will be used in the computation of the best-case analysis of a proposed project?

Fixed costs:

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:

Steele Insulators is analyzing a new type of insulation for interior walls.Management has compiled the following information to determine whether or not this new insulation should be manufactured.The insulation project has an initial fixed asset requirement of $1.3 million,which would be depreciated straight-line to zero over the 12-year life of the project.Projected fixed costs are $769,000 and the anticipated annual operating cash flow is $241,000.What is the degree of operating leverage for this project?

-McGilla Golf has decided to sell a new line of golf clubs.The clubs will sell for $500 per set and have a variable cost of $200 per set.The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years.The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs.The high-priced clubs sell at $700 and have variable costs of $300.The company will also increase sales of its cheap clubs by 9,000 sets.The cheap clubs sell for $200 and have variable costs of $100 per set.The fixed costs each year will be $7,559,000.The company has also spent $1,133,000 on research and development for the new clubs.The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis over the life of the project.The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project.The tax rate is 40 percent,and the cost of capital is 8 percent.What is the IRR?

The contribution margin per unit is equal to the:

What are the key features of the accounting,cash,and financial break-even points?

-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?

The degree of operating leverage is equal to:

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

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 $775 per unit,give or take 2 percent.The tax rate is 34 percent.The company is conducting a sensitivity analysis with fixed costs of $590,000.What is the OCF given this analysis?

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:

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

A proposed project has a contribution margin per unit of $13.10,fixed costs of $74,000,depreciation of $12,500,variable costs per unit of $22,and a financial break-even point of 11,360 units.What is the operating cash flow at this level of output?