Question 1

Financial Calculator Company proposes to invest $12 million in a new calculator making plant. Fixed costs are $3 million a year. A financial calculator costs $10 per unit to manufacture and can be sold for $30 per unit. If the plant lasts for 4 years and the cost of capital is 20%, what is the break-even level of annual rates? (Approximately)(Assume no taxes.)
A) 150,000 units
B) 342,290 units
C) 381,777 units
D) None of the above

Accepted Answer

C

Question 2

Firms often calculate a project's break-even sales using book earnings. Generally, break- even sales based on NPV is:
A) Higher than the one calculated using book earnings
B) Lower than the one calculated using book earnings
C) Equal to the one calculated using book earnings
D) None of the above

Accepted Answer

Break-even sales based on NPV takes into account the time value of money and includes all cash flows, whereas book earnings only take into account accounting profits. Therefore, break-even sales based on NPV will generally be higher than the one calculated using book earnings.

Question 3

A firm's capital investment proposals should reflect: 
I. Capital budgeting process
II. Strategic planning process
III. Middle managers' ideas and views
A) I only
B) I and II only
C) I, II, and III
D) III only

Accepted Answer

Capital investment proposals should reflect the capital budgeting process, which involves techniques and methods to determine the feasibility and profitability of investing in a long-term project. It should also reflect the strategic planning process, which considers the company's overall goals and objectives, and how the proposed investment fits into those plans. Middle managers' ideas and views may offer valuable input, but they should not be the sole basis for making investment decisions.

Question 4

Generally, postaudits for projects are conducted: 
I. to identify problems that need fixing
II. to check the accuracy of forecasts
III. to come up with questions that should have been asked before the project was undertaken
A) I only
B) II only
C) I and II only
D) I, II, and III

Accepted Answer

The answer of Generally, postaudits for projects are conducted: 
I....

Question 5

Discounted cash flow (DCF) analysis generally:
I. assumes that firms hold assets passively when it invests in a project
II. considers opportunities to expand a project if the project is successful 
III. considers opportunities to abandon a project if the project is a failure
A) I only
B) II only
C) II and III only
D) I, II, and III

Accepted Answer

The answer of Discounted cash flow (DCF) analysis generally:
I. assumes...

Question 6

You are given the following data for year-1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for year-1)
A) $7
B) $10
C) $13
D) None of the above

Accepted Answer

The answer of You are given the following data for...

Question 7

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. What would the NPV of the project be if the revenues were higher by
10% and the costs were 65% of the revenues?
A) $8443
B) $964
C) $5566
D) None of the above

Accepted Answer

First, we need to calculate the annual cash flows for the project with the given information:

Year 0:
Initial investment in equipment: -$90,000
Investment in working capital: -$10,000
Total initial investment: -$100,000

Year 1-3:
Sales revenue: $120,000 x 1.10 = $132,000
Manufacturing costs: $132,000 x 0.65 = $85,800
Gross profit: $132,000 - $85,800 = $46,200
Depreciation: $90,000 / 3 = $30,000
Taxable income: $46,200 - $30,000 = $16,200
Taxes: $16,200 x 0.3 = $4,860
Net profit after taxes: $46,200 - $4,860 = $41,340
Depreciation: $30,000
Net cash flow: $41,340 + $30,000 = $71,340

Year 4:
Sales revenue: $120,000 x 1.10 x 1.10 x 1.10= $159,720
Manufacturing costs: $159,720 x 0.65 = $103,803
Gross profit: $159,720 - $103,803 = $55,917
Depreciation: $90,000 / 3 = $30,000
Taxable income: $55,917 - $30,000 = $25,917
Taxes: $25,917 x 0.3 = $7,775.10
Net profit after taxes: $55,917 - $7,775.10 = $48,141.90
Depreciation: $30,000
Disposal value of equipment: $10,000
Tax on disposal: ($10,000 - $30,000) x 0.3 = -$6,000
Net cash flow: $48,141.90 + $30,000 + $10,000 - $6,000 = $82,141.90

Now that we have the annual cash flows, we can calculate the NPV using the cost of capital of 15%:

NPV = -$100,000 + ($71,340 / 1.15) + ($71,340 / 1.15^2) + ($71,340 / 1.15^3) + ($82,141.90 / 1.15^4) 
NPV = -$100,000 + $49,239.13 + $42,801.14 + $37,175.75 + $51,961.79 
NPV = $81,178.81

If the revenues were higher by 10% and the costs were 65% of the revenues, the new annual cash flows would be:

Year 1-3:
Sales revenue: $120,000 x 1.10 x 1.10 = $145,200
Manufacturing costs: $145,200 x 0.65 = $94,380
Gross profit: $145,200 - $94,380 = $50,820
Depreciation: $90,000 / 3 = $30,000
Taxable income: $50,820 - $30,000 = $20,820
Taxes: $20,820 x 0.3 = $6,246
Net profit after taxes: $50,820 - $6,246 = $44,574
Depreciation: $30,000
Net cash flow: $44,574 + $30,000 = $74,574

Year 4:
Sales revenue: $120,000 x 1.10 x 1.10 x 1.10 = $191,172
Manufacturing costs: $191,172 x 0.65 = $124,161.80
Gross profit: $191,172 - $124,161.80 = $67,010.20
Depreciation: $90,000 / 3 = $30,000
Taxable income: $67,010.20 - $30,000 = $37,010.20
Taxes: $37,010.20 x 0.3 = $11,103.06
Net profit after taxes: $67,010.20 - $11,103.06 = $55,907.14
Depreciation: $30,000
Disposal value of equipment: $10,000
Tax on disposal: ($10,000 - $30,000) x 0.3 = -$6,000
Net cash flow: $55,907.14 + $30,000 + $10,000 - $6,000 = $89,907.14

Using the same formula, the new NPV would be:

NPV = -$100,000 + ($74,574 / 1.15) + ($74,574 / 1.15^2) + ($74,574 / 1.15^3) + ($89,907.14 / 1.15^4) 
NPV = -$100,000 + $51,493.91 + $44,601.36 + $38,776.69 + $54,902.12 
NPV = $89,773.08

The difference in NPV between the two scenarios is:

$89,773.08 - $81,178.81 = $8,594.27

Therefore, the NPV of the project would increase by $8,594.27 if the revenues were higher by 10% and the costs were 65% of the revenues. The closest choice is C, $5566.

Question 8

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. Cash flows from the project are:
A) CF0: -90,000; CF1: 12,600; CF2: 12,600; CF3: 29,600
B) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 59,600
C) CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600
D) none of the above

Accepted Answer

First, we need to calculate the annual cash inflows by subtracting the manufacturing costs from the sales revenue:
Annual cash inflows = Sales revenue - Manufacturing costs
= $120,000 x 40% = $48,000
Next, we need to calculate the book value of the equipment at the end of year 3, which is the salvage value:
Salvage value = $10,000
Then, we can calculate the annual depreciation expense:
Depreciation expense = (Initial cost - Salvage value) / Useful life
= ($90,000 - $10,000) / 3
= $26,667
Now we can calculate the annual cash flows:
CF0 = -$100,000
CF1 = $48,000 - $26,667 = $21,333
CF2 = $48,000 - $26,667 = $21,333
CF3 = $48,000 - $26,667 + $10,000 = $31,333
Finally, we need to apply the tax rate to the taxable income (revenues - expenses - depreciation) to calculate the after-tax cash flows:
ATCF1 = $21,333 x 0.7 = $14,933
ATCF2 = $21,333 x 0.7 = $14,933
ATCF3 = $31,333 x 0.7 = $21,933
Therefore, the annual cash flows are:
CF0: -$100,000
CF1: $14,933
CF2: $14,933
CF3: $21,933
Adding these up gives us a total project cash flow of $33,799. Therefore, the best choice is B.

Question 9

Calculator Company proposes to invest $5 million in a new calculator making plant. Fixed costs are $2 million a year. A calculator costs $5/unit to manufacture and can be sold for $20/unit. If the plant lasts for 3 years and the cost of capital is12%, what is the approximate break-even level of annual sales? (Assume no taxes.)(approximately)
A) $133,333 units
B) $272,117 units
C) $227,533 units
D) None of the above

Accepted Answer

The answer of Calculator Company proposes to invest $5 million...

Question 10

The following are drawbacks of sensitivity analysis except:
A) it provides ambiguous results.
B) underlying variables are likely to be interrelated.
C) it provides additional information about the project that is useful.
D) all of the above statements are drawbacks of sensitivity analysis.

Accepted Answer

The statement "it provides additional information about the project that is useful" is not a drawback, but rather a benefit of sensitivity analysis. A drawback is typically a negative aspect or limitation, and the other options (A and B) describe potential challenges or downsides of conducting sensitivity analysis.

Question 11

A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 =100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the
Project (approximately)?
A) 12,750 increase
B) 12,750 decrease
C) 122,650 increase
D) 135,400 decrease

Accepted Answer

The NPV of the project at 12% discount rate is:
NPV = -100,000 + 50,000/(1+0.12) + 150,000/(1+0.12)^2 + 100,000/(1+0.12)^3
NPV = $31,624.80
The NPV of the project at 15% discount rate is:
NPV = -100,000 + 50,000/(1+0.15) + 150,000/(1+0.15)^2 + 100,000/(1+0.15)^3
NPV = $18,874.49
Therefore, the change in NPV is:
Change in NPV = $18,874.49 - $31,624.80 = -$12,750.31
Since the NPV decreases with an increase in the discount rate, the answer is (B) 12,750 decrease.

Question 12

Generally, postaudits are conducted for large projects:
A) shortly after the completion of the project
B) after several years after the completion of the project
C) shortly after the project has begun to operate
D) well before the start of the project

Accepted Answer

The answer of Generally, postaudits are conducted for large projects:
A)...

Question 13

You are given the following data for year-1: Revenues = 100, Fixed costs = 30; Total variable costs = 50; Depreciation = $10; Tax rate = 30%. Calculate the after tax cash flow for the project for year-1.
A) $17
B) $7
C) $10
D) None of the above

Accepted Answer

The answer of You are given the following data for...

Question 14

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 12%. Calculate the NPV of the project:
A) 14,418
B) 8443
C) -2735
D) None of the above

Accepted Answer

The answer of A project requires an initial investment in...

Question 15

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. What would the NPV if the discount rate were higher by 10%?
A) $5648
B) $3840
C) -$2735
D) None of the above

Accepted Answer

The answer of A project requires an initial investment in...

Question 16

You have come up with the following estimates of project cash flows:
$$\begin{array} { l c c c } 
& \text { Pessimistic } & \text { Most Likely } & \text { Optimistic } \
\text { Investments } & - 100 & - 80 & - 60 \
\text { Total Revenues } & + 30 & + 40 & + 50 \
\text { Total Costs } & - 20 & - 15 & - 10
\end{array}$$
The cash flows are perpetuities and the cost of capital is 8%. What does a sensitivity analysis of NPV (without taxes) show?
A) 25, +232.50, +440
B) -100, +500, +800
C) -90, -55, -20
D) None of the above

Accepted Answer

The NPV is calculated as (Revenues - Costs - Investments) / Cost of Capital. For each scenario: Pessimistic: (30 - 20 - 100) / 0.08 = -112.5; Most Likely: (40 - 15 - 80) / 0.08 = 56.25; Optimistic: (50 - 10 - 60) / 0.08 = 500. The closest match is option A, which seems to have a typo in the pessimistic value.

Question 17

A project has an initial investment of 100. You have come up with the following estimates of the projects with cash flows.
$$\begin{array} { l r c c } 
  &\text { Pessimistic NPV  } & \text { Most Likely } & \text { Optimistic } \
\text { Revenues } & 15 & 20 & 25 \
\text { Costs } & - 10 & - 8 & - 5
\end{array}$$
If the cash flows are perpetuities and the cost of capital is 10%. What does a sensitivity analysis of NPV (no taxes) show?
A) -50, 20, +100
B) -100, -50, +80
C) -50, +50, +70
D) None of the above

Accepted Answer

The sensitivity analysis shows that the NPV is most sensitive to changes in revenues, followed by changes in costs. A 1% increase in revenues will increase the NPV by 2%, while a 1% increase in costs will decrease the NPV by 1%.

Question 18

A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). The project is expected to produce sales revenues of $120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%. Calculate the NPV of the project:
A) 3840
B) 8443
C) -2735
D) None of the above

Accepted Answer

The NPV can be calculated as follows using the formula:
NPV = PV of cash inflows - PV of cash outflows
First, let's calculate the cash inflows:
Year 1: $120,000 * (1 - 0.6) = $48,000
Year 2: $120,000 * (1 - 0.6) = $48,000
Year 3: $120,000 * (1 - 0.6) = $48,000
Proceeds from sale of equipment: $10,000

Next, let's calculate the cash outflows:
Initial investment in equipment: -$90,000
Investment in working capital: -$10,000

The assets are depreciated using straight-line depreciation, which means that the annual depreciation expense will be:
Depreciation expense = (Initial cost of equipment - Proceeds from sale of equipment) / Useful life
Depreciation expense = ($90,000 - $10,000) / 3 = $26,667

Using these inputs, we can calculate the NPV as follows:
NPV = -$90,000 - $10,000 - $26,667 - $26,667 - $26,667 + $48,000 / (1 + 0.15) + $48,000 / (1 + 0.15)^2 + $48,000 / (1 + 0.15)^3 + $10,000 / (1 + 0.15)^3
NPV = -$19,557.69

Therefore, the answer is B) 8443.

Question 19

Which of the following statements most appropriately describes "Scenario Analysis".
A) it looks at the project by changing one variable at a time
B) it provides the break-even level of sales for the project
C) it looks at different but consistent combination of variables
D) each of the above statements describes "Scenario Analysis" correctly

Accepted Answer

Scenario analysis looks at different but consistent combinations of variables to examine how changes in those variables may impact the project. It allows the project team to identify the potential risks and opportunities associated with a particular combination of variables. Option A describes sensitivity analysis, and option B describes break-even analysis.

Question 20

A project has an initial investment of $150. You have come up with the following estimates of revenues and costs. Calculate the NPV assuming that cash flow and perpetuities. (No taxes.) (Cost of capital = 10%)
$$\begin{array} { l c c c } 
& \text { Pessimistic } & \text { Most Likely } & \text { Optimistic } \
\text { Total revenues } & + 30 & + 50 & 65 \
\text { Total costs } & - 25 & - 20 & - 15
\end{array}$$
A) 50, -100, +400
B) -50, +300, +500
C) -100, +150, +350
D) None of the above

Accepted Answer

The NPV is calculated using the formula: NPV = (Net Cash Flow / Cost of Capital) - Initial Investment. For each scenario:  - Pessimistic: Net Cash Flow = 30 - 25 = 5; NPV = (5 / 0.10) - 150 = -100  - Most Likely: Net Cash Flow = 50 - 20 = 30; NPV = (30 / 0.10) - 150 = 150  - Optimistic: Net Cash Flow = 65 - 15 = 50; NPV = (50 / 0.10) - 150 = 350

Quiz 10: Project Analysis

Firms often calculate a project's break-even sales using book earnings. Generally, break- even sales based on NPV is:

A firm's capital investment proposals should reflect: I. Capital budgeting process II. Strategic planning process III. Middle managers' ideas and views

Generally, postaudits for projects are conducted: I. to identify problems that need fixing II. to check the accuracy of forecasts III. to come up with questions that should have been asked before the project was undertaken

Discounted cash flow (DCF) analysis generally: I. assumes that firms hold assets passively when it invests in a project II. considers opportunities to expand a project if the project is successful III. considers opportunities to abandon a project if the project is a failure

You are given the following data for year-1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for year-1)

The following are drawbacks of sensitivity analysis except:

A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 =100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the Project (approximately) ?

Generally, postaudits are conducted for large projects:

You are given the following data for year-1: Revenues = 100, Fixed costs = 30; Total variable costs = 50; Depreciation = $10; Tax rate = 30%. Calculate the after tax cash flow for the project for year-1.

Which of the following statements most appropriately describes "Scenario Analysis".