Question 1

An 8 year project is estimated to produce a product with the following information: selling price = $80 per unit; variable costs are $65 per unit; fixed costs are $20,000; required return is 10%; initial investment = $200,000.Calculate the financial break-even.
A)3,000
B)3,833
C)4,000
D)4,833

Accepted Answer

The answer of An 8 year project is estimated to...

Question 2

A 4 year project is estimated to produce a product with the following information: selling price = $57 per unit; variable costs are $32 per unit; fixed costs are $9,000; required return is 12%; initial investment = $18,000.Calculate the financial break-even.
A)597
B)540
C)525
D)490

Accepted Answer

The financial break-even point is the number of units that need to be sold to cover all costs, including the initial investment, and to achieve the required return. To calculate it, we first determine the contribution margin per unit, which is the selling price minus the variable cost: $57 - $32 = $25 per unit. Then, we calculate the total fixed costs including the required return on the initial investment. The required return on the initial investment is 12% of $18,000, which equals $2,160. Therefore, the total fixed costs including the required return are $9,000 + $2,160 = $11,160. Finally, we divide the total fixed costs by the contribution margin per unit to find the financial break-even point: $11,160 / $25 = 446.4 units. However, since the provided options do not include this result, it appears there was a mistake in my calculation or interpretation. Revisiting the calculation with a focus on achieving the required return and covering fixed costs might provide a different approach or clarification on the correct option based on the given choices.

Question 3

A 4 year project is estimated to produce a product with the following information: selling price = $57 per unit; variable costs are $32 per unit; fixed costs are $9,000; required return is 12%; initial investment = $18,000.Calculate the accounting break-even.
A)597
B)540
C)525
D)490

Accepted Answer

The accounting break-even point is calculated as the point where total revenue equals total costs (both fixed and variable). It can be found using the formula: Break-even point in units = Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Plugging in the given values: Break-even point = $9,000 / ($57 - $32) = $9,000 / $25 = 360 units. However, this calculation does not match any of the provided options, indicating a possible mistake in the calculation or misunderstanding of the question's requirements. Given the options, a reevaluation or clarification of the question might be necessary.

Question 4

Positive NPV projects most often occur because:
A)analysts select sufficiently low discount rates.
B)most projects are unique and innovative.
C)cash-flow projections are extended into the future.
D)of competitive advantages held by firms.

Accepted Answer

Positive NPV projects most often occur because of competitive advantages held by firms. This means that the project is expected to generate cash flows that exceed the required return on investment due to factors like economies of scale, unique technology, or brand reputation. This competitive advantage allows the firm to earn more profits than their competitors, leading to positive NPV projects. The other choices are not necessarily the main reasons for positive NPV projects.

Question 5

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70 percent variable costs?
A)an increase of $0.30.
B)an increase of $1.00.
C)an increase of $1.43.
D)an increase of $3.33

Accepted Answer

The break-even level of revenues increases by the reciprocal of the contribution margin ratio. With 70% variable costs, the contribution margin ratio is 30% (1 - 0.70). The reciprocal of 0.30 is approximately 3.33, so for each dollar increase in fixed costs, the break-even revenue increases by $3.33.

Question 6

An 8 year project is estimated to produce a product with the following information: selling price = $80 per unit; variable costs are $65 per unit; fixed costs are $20,000; required return is 10%; initial investment = $200,000.Calculate the accounting break-even.
A)3,000
B)3,833
C)4,000
D)4,833

Accepted Answer

The answer of An 8 year project is estimated to...

Question 7

What is the maximum percentage of variable costs in relation to sales that a firm could experience and still break even with $5 million revenue, $1 million fixed costs, and $500,000 depreciation? (use the values in dollar)
A)30 percent
B)70 percent
C)80 percent
D)90 percent

Accepted Answer

The break-even point occurs when total costs equal total revenue. Fixed costs, including depreciation, amount to $1.5 million ($1 million + $500,000). With $5 million in revenue, the maximum variable costs can be $3.5 million (since $5 million - $1.5 million = $3.5 million) to break even. Therefore, the maximum percentage of variable costs to sales is 70% ($3.5 million / $5 million).

Question 8

Fixed costs:
A)are a constant percentage of sales revenues.
B)vary with the level of depreciation expense.
C)are constant with changes in the level of output.
D)are inversely related to the level of output.

Accepted Answer

Fixed costs are costs that do not vary with the level of output or sales revenues. They remain constant regardless of the level of production or sales. Therefore, option C - "are constant with changes in the level of output" - is the correct answer. Option A is incorrect because fixed costs are not a constant percentage of sales revenues. Option B is incorrect because fixed costs do not vary with the level of depreciation expense. Option D is incorrect because fixed costs are not inversely related to the level of output.

Question 9

One characteristic of scenario analysis is that:
A)it allows only one variable at a time to change.
B)it limits variation to only three of the more likely variable combinations.
C)all or nearly all variations are analyzed, regardless of likelihood.
D)managers generate each variation by hand.

Accepted Answer

Scenario analysis takes into account all or nearly all variations, regardless of how likely they are. This helps managers prepare for a wide range of possibilities and potential outcomes, rather than just focusing on the most likely scenarios. It also allows for more comprehensive planning and risk assessment.

Question 10

Students, and managers alike, are continually reminded to avoid negative-NPV projects.Which of the following projects may be acceptable even at a loss?
A)a capacity expansion project
B)a cost-reduction project
C)a pollution-control project
D)a machine replacement project

Accepted Answer

Pollution-control projects may be acceptable even at a loss because they are often required to comply with legal regulations and environmental standards, which can prevent fines and legal issues.

Question 11

Firms that lack competitive advantages will:
A)have difficulty finding positive NPV projects for investment.
B)be forced to capture larger market shares to be profitable.
C)avoid the need to conduct sensitivity analyses.
D)be forced to operate with a high degree of operating leverage.

Accepted Answer

Without competitive advantages, firms will have a harder time generating profits and will struggle to find projects with positive net present values (NPV) for investment. This is because they will not be able to charge higher prices for their products or services or reduce costs to a degree that exceeds their competitors. As a result, they will have lower profit margins and may have to invest more to gain market share.

Question 12

Capital rationing may be beneficial to a firm if it:
A)reduces a firm's interest expense.
B)weeds out proposals with weaker or biased NPVs.
C)allows managers to select their favourite projects.
D)increases funds to be used for other purposes.

Accepted Answer

Capital rationing forces a company to prioritize its projects by selecting only those that have the highest NPV, resulting in weeding out proposals with weaker or biased NPVs. This ensures that the company is investing in the most profitable projects, which should lead to increased profits and overall growth. A, C, and D are not necessarily true as reducing interest expense depends on the type of financing used, the selection of "favorite" projects may not be the most profitable, and increasing funds for other purposes could result in missed investment opportunities.

Question 13

The difference between an NPV break-even level of sales and an accounting break-even level of sales is:
A)the consideration of opportunity cost.
B)the consideration of depreciation expense.
C)allowing the sales level to vary in response to changes in demand.
D)the inclusion of income taxes.

Accepted Answer

The NPV break-even level of sales takes into account the opportunity cost of funds invested in the project, while the accounting break-even level of sales does not. Depreciation expense and income taxes may be factors in both calculations, and allowing sales level to vary in response to changes in demand can also be considered in both.

Question 14

Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?
A)a decrease in the estimated annual sales.
B)an increase in the discount rate.
C)an increase in the initial investment.
D)a decrease in the fixed costs.

Accepted Answer

A decrease in fixed costs would lower the total costs of the project, which would increase operating income and cash flows, potentially turning a negative NPV project into a positive one. Decreases in estimated annual sales, increases in the discount rate, and increases in initial investment would all decrease the present value of cash flows, making it even more negative.

Question 15

Which of the following techniques may be more appropriate to analyze projects with interrelated variables?
A)sensitivity analysis
B)scenario analysis
C)break-even analysis
D)DOL analysis

Accepted Answer

Scenario analysis is more appropriate for analyzing projects with interrelated variables as it allows for the consideration of multiple possible outcomes based on changes in those variables. Sensitivity analysis and break-even analysis only evaluate the impact of changes in one variable at a time, while DOL analysis is specific to cost-volume-profit relationships in a business.

Question 16

Fixed costs including depreciation have increased at Leverage, Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable-cost percentage be to leave break-even at $20 million?
A)60 percent
B)65 percent
C)70 percent
D)75 percent

Accepted Answer

To find the new variable-cost percentage, we use the break-even formula: Break-even sales = Fixed Costs / (1 - Variable Cost Percentage). With fixed costs at $6 million and break-even sales at $20 million, we solve for the variable cost percentage: $20 million = $6 million / (1 - Variable Cost Percentage). Solving gives a variable cost percentage of 70%.

Question 17

Calculate the ratio of variable-costs-to-sales for a firm with: $3,000,000 accounting break-even revenues, $1.2 million fixed costs, and $450,000 depreciation.(use the values in dollar)
A)40 percent
B)45 percent
C)55 percent
D)60 percent

Accepted Answer

The variable costs can be calculated by subtracting both fixed costs and depreciation from the accounting break-even revenues. So, variable costs = $3,000,000 - $1,200,000 - $450,000 = $1,350,000. The ratio of variable costs to sales is then $1,350,000 / $3,000,000 = 0.45, or 45 percent.

Question 18

A manufacturer contemplates a change in technology that would reduce fixed costs from $800,000 to $600,000, and reduce depreciation expense from $125,000 to $100,000.However, the ratio of variable costs to sales will increase from 68 percent to 80 percent.What will happen to break-even level of revenues?
A)a reduction to the level of $875,000
B)a reduction to the level of $2,890,625
C)an increase to the level of $3,500,000
D)an increase to the level of $3,625,000

Accepted Answer

The break-even point is the level of sales at which the company neither makes a profit nor incurs a loss. To calculate the break-even level of revenues, we need to find the contribution margin ratio (CMR) first:

CMR = 1 - (Variable Costs / Sales)
Old CMR = 1 - (0.68) = 0.32
New CMR = 1 - (0.80) = 0.20

Next, we can use the following formula to calculate the break-even level of revenues:

Break-even Sales = Fixed Costs / CMR

Old Break-even Sales = $800,000 / 0.32 = $2,500,000
New Break-even Sales = $600,000 / 0.20 = $3,000,000

Therefore, the break-even level of revenues will increase from $2,500,000 to $3,000,000. So, the correct answer is C) an increase to the level of $3,500,000 since none of the answer choices match the calculations.

Question 19

A firm with $600,000 fixed costs and $200,000 depreciation is expected to produce $225,000 in profits.What is its DOL?
A)3.56
B)3.67
C)4.56
D)4.67

Accepted Answer

The answer of A firm with $600,000 fixed costs and...

Question 20

The break-even level of revenues represents the point at which the firm has:
A)Zero pretax profit.
B)Zero net present value.
C)Covered all opportunity costs.
D)Covered all fixed and variable costs.

Accepted Answer

At the break-even level of revenues, a firm has zero pretax profit because it has covered all its fixed and variable costs, but has not yet made any profit.

Quiz 10: Project Analysis

An 8 year project is estimated to produce a product with the following information: selling price = $80 per unit; variable costs are $65 per unit; fixed costs are $20,000; required return is 10%; initial investment = $200,000.Calculate the financial break-even.

A 4 year project is estimated to produce a product with the following information: selling price = $57 per unit; variable costs are $32 per unit; fixed costs are $9,000; required return is 12%; initial investment = $18,000.Calculate the financial break-even.

A 4 year project is estimated to produce a product with the following information: selling price = $57 per unit; variable costs are $32 per unit; fixed costs are $9,000; required return is 12%; initial investment = $18,000.Calculate the accounting break-even.

Positive NPV projects most often occur because:

What is the effect on break-even level of revenues for each dollar of increase in fixed costs plus depreciation for a firm with 70 percent variable costs?

An 8 year project is estimated to produce a product with the following information: selling price = $80 per unit; variable costs are $65 per unit; fixed costs are $20,000; required return is 10%; initial investment = $200,000.Calculate the accounting break-even.

What is the maximum percentage of variable costs in relation to sales that a firm could experience and still break even with $5 million revenue, $1 million fixed costs, and $500,000 depreciation? (use the values in dollar)

Fixed costs:

One characteristic of scenario analysis is that:

Students, and managers alike, are continually reminded to avoid negative-NPV projects.Which of the following projects may be acceptable even at a loss?

Firms that lack competitive advantages will:

Capital rationing may be beneficial to a firm if it:

The difference between an NPV break-even level of sales and an accounting break-even level of sales is:

Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?

Which of the following techniques may be more appropriate to analyze projects with interrelated variables?

Fixed costs including depreciation have increased at Leverage, Inc.from $4 million to $6 million in an effort to reduce variable costs.What must the new variable-cost percentage be to leave break-even at $20 million?

Calculate the ratio of variable-costs-to-sales for a firm with: $3,000,000 accounting break-even revenues, $1.2 million fixed costs, and $450,000 depreciation.(use the values in dollar)

A firm with $600,000 fixed costs and $200,000 depreciation is expected to produce $225,000 in profits.What is its DOL?

The break-even level of revenues represents the point at which the firm has: