Question 1

Excom Fiberoptics is bidding on contracts to sell micro test tubes for biotechnology research.in sets of 1,000 tubes.Fixed costs including depreciation associated with the project are $2,000,000, variable cost per set is $16.Excom expects to sell 250,000 sets.What is the minimum price it can charge and reach the accounting break-even point?
A)$8
B)$12
C)$24
D)$20

Accepted Answer

The accounting break-even point is reached when total revenue equals total costs (both fixed and variable). Fixed costs are $2,000,000, variable cost per set is $16, and Excom expects to sell 250,000 sets. The total variable cost is $16 * 250,000 = $4,000,000. The total cost is the sum of fixed and variable costs, which is $2,000,000 + $4,000,000 = $6,000,000. To find the minimum price per set to break even, divide the total cost by the number of sets: $6,000,000 / 250,000 = $24.

Question 2

Accounting break-even analysis uses -
A)free cash flows over the entire life of a project.
B)sales, variable costs and fixed costs over the entire life of a project.
C)sales, variable costs and fixed costs for a single period.
D)free cash flows for a single period.

Accepted Answer

Accounting break-even analysis only considers the sales, variable costs, and fixed costs for a single period in order to determine the level of sales needed to cover all costs and break-even. Free cash flows over the entire life of a project would not be relevant in this analysis as it focuses on short-term profitability.

Question 3

Miller River Light is evaluating a project that will require an initial investment of $350,000.Miller River uses a 12% discount rate for capital projects of this type.What level of operating cash flows over a period of 5 years will cause the project to reach break-even NPV? Assume cash flows come in the form of an end-of-the-year annuity.
A)$70,000.00
B)$97,093.41
C)$92,329.12
D)$86,690.54

Accepted Answer

To calculate the break-even NPV, we need to find the cash flows required to make the NPV equal to zero.

First, we need to calculate the annual operating cash flows that the project will generate. Let's assume that the project will generate a constant operating cash flow of CF each year over the next 5 years.

The present value of these cash flows can be calculated using the following formula:

PV = CF * [1 - (1 + r)^-n] / r

where PV is the present value, CF is the annual cash flow, r is the discount rate, and n is the number of years.

Substituting the values, we get:

$350,000 = CF * [1 - (1 + 0.12)^-5] / 0.12

Solving for CF, we get:

CF = $97,093.41

So the annual operating cash flow required to break-even is $97,093.41.

Question 4

Everything Donut plans to sell donuts at a local farmer's market.The permit and space rental will cost them $2,000 for the June through August season.The donuts will sell for $7.00 per dozen.Ingredients and overhead average $4.00 per dozen.They also have to pay five percent of her gross sales to the markets' organizers.How many dozens of donuts will they need to sell to cover fixed costs and realize a $3,000 profit?
A)752 dozen
B)1,667 dozen
C)1,887 dozen
D)1,250 dozen

Accepted Answer

To cover fixed costs, Everything Donut would need to earn back the $2,000 fee for permit and space rental, as well as the 5% of gross sales they have to pay to the market organizers.

Total fixed costs:
$2,000 (permit and space rental fee) + 5% of gross sales

To realize a $3,000 profit:
Profit = Revenue - Costs 
$3,000 = (Number of dozens sold * $7.00 per dozen) - (Number of dozens sold * $4.00 per dozen) - $2,000 - 5% of gross sales

Simplifying this equation, we get: 
$3,000 + $2,000 + 5% of gross sales = Number of dozens sold * $3.00 per dozen

$5,000 + 0.05 * (Number of dozens sold * $7.00) = Number of dozens sold * $3.00

$5,000 + 0.35 * Number of dozens sold = 3 * Number of dozens sold

$5,000 = 1.65 * Number of dozens sold

Number of dozens sold = $5,000 / 1.65

Number of dozens sold = 1,887.88

Rounding up to the nearest whole number, Everything Donut would need to sell 1,888 dozens of donuts to cover fixed costs and realize a $3,000 profit.

Therefore, the best choice is C) 1,887 dozen.

Question 5

Bippert's farm is evaluating a proposal to plant 5,000 apple trees at an initial cost of $10,000.The trees will be sold in 5 years.What is the minimum after-tax cash flow from selling the trees that will allow the tree planting project to reach break even NPV? Use a discount rate of 12%.
A)$12,000.00
B)$5,674.26
C)$17,623.42
D)$17,958.56

Accepted Answer

The answer of Bippert's farm is evaluating a proposal to...

Question 6

Everything Donut plans to sell donuts at a local farmer's market.The permit and space rental will cost her $2,000 for the June through August season.The donuts will sell for $7.00 per dozen.Ingredients and overhead average $4.00 per dozen.They also have to pay 5% of her gross sales to the markets' organizers.How many dozens of donuts will she need to sell to cover her fixed costs?
A)755 dozen with a very small profit on the last dozen.
B)667 dozen with a very small profit on the last dozen.
C)301 dozen
D)They can never break even.

Accepted Answer

To cover her fixed costs, Everything Donut needs to calculate the total cost per dozen, including the variable cost of ingredients and overhead ($4.00), plus the 5% of gross sales ($0.35 per dozen, since 5% of $7.00 is $0.35), making the total cost per dozen $4.35. The profit per dozen is $7.00 - $4.35 = $2.65. To cover the fixed costs of $2,000, divide $2,000 by $2.65, which equals approximately 754.7 dozen. Therefore, she needs to sell 755 dozen to cover her fixed costs, with a very small profit on the last dozen.

Question 7

July sales for Amherst Arcade equal $100,000, variable costs equal $60,000 and fixed costs, including depreciation of $20,000, total $60,000.Which of the following is correct?
A)Amherst Arcade broke even with respect to net income.
B)Amherst Arcade broke even with respect to cash.
C)Amherst Arcade fell $20,000 short of cash break-even.
D)Amherst Arcade broke even with a $20,000 surplus.

Accepted Answer

Amherst Arcade's total costs (variable + fixed) are $120,000 ($60,000 + $60,000). However, depreciation is a non-cash expense, so when calculating cash break-even, it should be added back to the net income. The actual cash costs are $100,000 ($60,000 variable + $40,000 fixed excluding depreciation), matching the sales revenue, indicating a cash break-even situation.

Question 8

Miniature Molding is planning to introduce a valve for use in medical implants.Variable costs per unit are $250.The maximum price MM could charge is $325.Fixed costs associated with this product are $20,000,000.Depreciation expense of $2,500,000 is included in fixed costs.The worst-case forecast calls for sales of 240,000 valves, the best-case for $290,400.Will MM reach cash break-even in the worst-case scenario?
A)Sales will fall short of cash break-even by $8,666,667.
B)The product will exactly break even.
C)Sales will fall short of cash break-even by $2,000,025.
D)Sales will exceed cash break-even by $2,166,667.

Accepted Answer

To calculate the cash break-even point, we exclude non-cash expenses like depreciation from the fixed costs. So, the cash fixed costs are $20,000,000 - $2,500,000 = $17,500,000. The contribution margin per unit is the selling price minus variable costs, which is $325 - $250 = $75. The number of units needed to break even in cash terms is the cash fixed costs divided by the contribution margin per unit, which is $17,500,000 / $75 = 233,333.33 units. In the worst-case scenario, with sales of 240,000 units, MM will exceed this break-even point, indicating they will exceed cash break-even.

Question 9

Variable cost for Light.com's fluorescent tubes is $12.50, and the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.What is the break-even quantity for the fluorescent tubes?
A)600,000
B)1,000,000
C)375,000
D)7,500,000

Accepted Answer

The break-even quantity is calculated by dividing the fixed costs by the contribution margin per unit (selling price - variable cost). Here, it is $7,500,000 / ($20.00 - $12.50) = 1,000,000 units.

Question 10

[blank] occurs when a portion of the company's assets are financed with securities, such as debt and preference shares, which pay a fixed amount of return to investors.
A)Financial leverage
B)Operating leverage
C)Premium leverage
D)Fixed leverage

Accepted Answer

Financial leverage refers to the use of debt and other securities to finance a portion of a company's assets. This creates fixed costs such as interest payments, regardless of the company's level of sales or profits. The use of financial leverage can increase a company's returns on equity, but it also increases the risk of financial distress if the company is unable to meet its interest payments.

Question 11

Variable cost for Light.com's fluorescent tubes is $12.50, the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.$500,000 in depreciation expense is included in fixed costs.What is the cash break-even quantity for the fluorescent tubes?
A)933,333
B)1,000,000
C)375,000
D)1,066,667

Accepted Answer

The cash break-even point is calculated by dividing the total fixed costs, excluding non-cash expenses like depreciation, by the contribution margin per unit. Here, the fixed costs excluding depreciation are $7,500,000 - $500,000 = $7,000,000. The contribution margin per unit is the selling price minus the variable cost, which is $20.00 - $12.50 = $7.50. Therefore, the cash break-even quantity is $7,000,000 / $7.50 = 933,333 units.

Question 12

The Buffalo Philharmonic Orchestra is planning to present performances on two consecutive nights in January.It will cost them $5,000 per night for musicians, theatre rental, and event insurance.The theatre will also take 10% of gross ticket sales.How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization?
A)1000 tickets
B)1,112 tickets
C)1,223 tickets
D)There is not enough information

Accepted Answer

To raise $1,000, the orchestra needs to earn $2,000 (since the theatre will take 10% of gross ticket sales). 
$2,000 ÷ $10.00 per ticket = 200 tickets per night. 
200 tickets per night x 2 nights = 400 tickets total. 
However, the orchestra still needs to cover the cost of $5,000 per night x 2 nights = $10,000. 
$10,000 + $1,000 (for their organization) = $11,000 total revenue needed. 
$11,000 ÷ $10.00 per ticket = 1,100 tickets. 
Since we round up for ticket sales, the orchestra needs to sell at least 1,223 tickets to raise $1,000 after all expenses. Therefore, the answer is C.

Question 13

The Buffalo Philharmonic Orchestra is planning to present performances on two consecutive nights in January.It will cost them $5,000 per night for the musicians, theatre rental and event insurance.The theatre will also take 10% of gross ticket sales.How many tickets must they sell at $10.00 per ticket to break even?
A)1000 tickets
B)1,112 tickets
C)1,223 tickets
D)There is not enough information

Accepted Answer

Total cost for two nights = $5,000 * 2 = $10,000
Theatre would take 10% of gross ticket sales for two nights = 10% * 2 * ($10.00 * x) where x is the number of tickets sold
Net earnings required to break even = $10,000 + 10% * 2 * ($10.00 * x) = $10,000 + $2.00x
To break even, net earnings must equal gross earnings which is ticket price multiplied by the number of tickets sold. Therefore, we can set up the following equation:
$10.00x = $10,000 + $2.00x
$8.00x = $10,000
x = $10,000/$8.00
x = 1,250
However, this is the gross sales required and we need to subtract the theatre's 10%. Therefore, the net ticket sales required is:
1,250 * 90% = 1,112 tickets. 
Therefore, the answer is B) 1,112 tickets.

Question 14

In the fourth year of the Vidler Project, expected revenues will be $4,750,000, variable costs will be $4,000,000, depreciation expense $180,000 and fixed cash costs $570,000.Which of the following is true?
A)Accounting income equals $0.00
B)Free cash flow equals $180,000
C)Free cash flow equals 0
D)Both A and B are true.

Accepted Answer

Free cash flow is calculated as net income plus depreciation (since depreciation is a non-cash expense) minus capital expenditures. In this case, net income is calculated as revenues minus variable costs, fixed costs, and depreciation. So, net income = $4,750,000 - $4,000,000 - $570,000 - $180,000 = $0. Since there's no mention of capital expenditures, we assume it to be $0 for this calculation. Therefore, free cash flow = $0 + $180,000 - $0 = $180,000. Hence, both statements A and B are true.

Question 15

Garcia Developers will erect a small office building at a cost of $4,500,000.They have a client who will lease the space for 5 years at a price that will produce free cash flows of $150,000 per year.For approximately how much would they need to sell the building for at the end of the 5th year to reach break-even NPV? Garcia uses a discount rate of 10% for projects of this type.
A)$3,750,000
B)$5,755,936
C)$6,331,530
D)$6,964,683

Accepted Answer

To find the break-even sale price at the end of the 5th year, we first calculate the present value (PV) of the free cash flows over the 5 years, and then determine how much the sale price needs to be to make the NPV equal to zero. The formula for the present value of an annuity is PV = C * [(1 - (1 + r)^-n) / r], where C is the annual cash flow, r is the discount rate, and n is the number of periods.For the annual cash flows of $150,000 over 5 years at a 10% discount rate, the PV is approximately $568,807. Then, to break even, the total of this PV and the sale price in the 5th year, discounted back to present value, must equal the initial investment of $4,500,000.The equation to solve for the sale price (S) at the end of the 5th year is: $4,500,000 = $568,807 + S / (1 + 0.10)^5. Solving for S gives a value close to $6,331,530, which is option C.

Question 16

Project Zeta is expected to produce after-tax cash flows of $30 million in year 1, $40 million in year 2 and $50 million in year 3.If the company uses a 12% required rate of return, what is the most it can invest in this project and break even with respect to NPV?
A)$69.03 million
B)$94.26 million
C)$1,11 million
D)$120 million

Accepted Answer

To calculate the maximum investment amount that will result in a zero NPV, we need to use the NPV formula:

NPV = CF1/(1+r)^t1 + CF2/(1+r)^t2 + CF3/(1+r)^t3 - Initial Investment

Where CF is the cash flow in each year, t is the year, r is the required rate of return, and the initial investment is what we want to find out.

Setting the NPV to zero and rearranging the formula to solve for the initial investment, we get:

Initial Investment = (CF1/(1+r)^t1 + CF2/(1+r)^t2 + CF3/(1+r)^t3)

Plugging in the values we get:

Initial Investment = (30/(1+0.12)^1 + 40/(1+0.12)^2 + 50/(1+0.12)^3) = $94.26 million

Therefore, the most the company can invest in this project and break even with respect to NPV is $94.26 million. Answer: B.

Question 17

At the break-even NPV point,
A)the present value of operating cash flows equals the initial amount invested.
B)the NPV of the project is equal to zero.
C)the project's IRR is equal to the project's required rate of return.
D)All of the above.

Accepted Answer

At the break-even NPV point, all three conditions are met: the present value of operating cash flows equals the initial amount invested, the NPV of the project is zero, and the project's IRR equals the project's required rate of return.

Question 18

DNATECH has developed a hair growth treatment at a cost of $10 million.They can license the technology to another company for a period of 10 years.What is the minimum annual free cash flow they could accept in order to reach break-even NPV on this product? Use a discount rate of 8%.
A)$1,490,295
B)$1,639,324
C)$1,108,000
D)$1,000,000

Accepted Answer

The answer of DNATECH has developed a hair growth treatment...

Question 19

Miniature Molding is planning to introduce a valve for use in medical implants.Variable costs per unit are $250.The maximum price MM could charge is $325.Fixed costs associated with this product are $20,000,000.The worst-case forecast calls for sales of 240,000 valves, the best-case for 290,400.Will MM reach accounting break-even in the worst-case scenario?
A)Sales will fall short of break-even by $8,666,667.
B)The product will exactly break even.
C)Sales will fall short of break even by $5,000,025.
D)Sales will exceed break even by $58,000,000.

Accepted Answer

Sales will fall short of break-even by $8,666,667.

Question 20

Brookfield Heavy Equipment is considering a project that will produce after-tax cash of $40,000 per year for 5 years.The project will require an initial investment of $144,191.At what discount rate will the project reach break-even NPV?
A)8%
B)10%
C)12%
D)11.11%

Accepted Answer

To calculate the break-even discount rate, we need to set the NPV equal to zero and solve for the discount rate.

NPV = -initial investment + PV of cash flows 
0 = -$144,191 + PV annuity factor * $40,000

Using a financial calculator or excel, we can find that the PV annuity factor for 5 years at a 12% discount rate is 3.60478.

0 = -$144,191 + 3.60478 * $40,000 
$144,191/ $40,000 = 3.60478

Therefore, the break-even discount rate is approximately 12%. Choice C is the best answer.

Quiz 15: Analysis and Impact of Leverage

Accounting break-even analysis uses -

Bippert's farm is evaluating a proposal to plant 5,000 apple trees at an initial cost of $10,000.The trees will be sold in 5 years.What is the minimum after-tax cash flow from selling the trees that will allow the tree planting project to reach break even NPV? Use a discount rate of 12%.

July sales for Amherst Arcade equal $100,000, variable costs equal $60,000 and fixed costs, including depreciation of $20,000, total $60,000.Which of the following is correct?

Variable cost for Light.com's fluorescent tubes is $12.50, and the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.What is the break-even quantity for the fluorescent tubes?

[blank] occurs when a portion of the company's assets are financed with securities, such as debt and preference shares, which pay a fixed amount of return to investors.

Variable cost for Light.com's fluorescent tubes is $12.50, the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.$500,000 in depreciation expense is included in fixed costs.What is the cash break-even quantity for the fluorescent tubes?

In the fourth year of the Vidler Project, expected revenues will be $4,750,000, variable costs will be $4,000,000, depreciation expense $180,000 and fixed cash costs $570,000.Which of the following is true?

Project Zeta is expected to produce after-tax cash flows of $30 million in year 1, $40 million in year 2 and $50 million in year 3.If the company uses a 12% required rate of return, what is the most it can invest in this project and break even with respect to NPV?

At the break-even NPV point,

DNATECH has developed a hair growth treatment at a cost of $10 million.They can license the technology to another company for a period of 10 years.What is the minimum annual free cash flow they could accept in order to reach break-even NPV on this product? Use a discount rate of 8%.

Brookfield Heavy Equipment is considering a project that will produce after-tax cash of $40,000 per year for 5 years.The project will require an initial investment of $144,191.At what discount rate will the project reach break-even NPV?