Question 1

Lemminburg Plastics estimates a 60% probability that sales of pink flamingo lawn ornaments in the summer of 2011 will be 45,000 units,about the same as in 2010.They believe there is a 20% probability that they will go viral and potential sales would be 90,000.There is also a 20% probability that restrictive zoning ordinances will limit sales to 30,000 units.Expected unit sales of the pink flamingos are
A)55,000.
B)51,000.
C)67,500.
D)60,000.

Accepted Answer

To calculate the expected unit sales, we need to multiply the probability of each outcome by its respective unit sales and then add them up.

Expected unit sales = (0.6 x 45,000) + (0.2 x 90,000) + (0.2 x 30,000) 
Expected unit sales = 27,000 + 18,000 + 6,000 
Expected unit sales = 51,000

Therefore, the expected unit sales of pink flamingos in the summer of 2011 is 51,000, which corresponds to choice B.

Question 2

The form of risk analysis that examines the effect of various combinations of value drivers is known as
A)scenario analysis.
B)sensitivity analysis.
C)value driver analysis.
D)expected value analysis.

Accepted Answer

Scenario analysis examines the effect of various combinations of value drivers. Sensitivity analysis examines the effect of changing one value driver while keeping others constant. Value driver analysis identifies and examines the key drivers of value in a business, while expected value analysis calculates the average outcome of multiple scenarios based on probabilities assigned to each scenario. Therefore, the correct answer is scenario analysis.

Question 3

Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate?
A)Sensitivity analysis
B)Simulation analysis
C)Value driver analysis
D)Scenario analysis

Accepted Answer

Simulation analysis involves running multiple scenarios and analyzing the frequency and likelihood of different outcomes, resulting in a probability distribution. Sensitivity analysis, value driver analysis, and scenario analysis all involve analyzing the impact of different variables on project outcomes, but they do not necessarily result in a probability distribution.

Question 4

Economists at PHE Llc estimate a 20% probability of a recession next year,a 50% probability of an average economy,and a 30% probability of a rapid expansion.If there is a recession,the NPV of project O will be $20 million;if the economy is average,it will be $45 million and in case of a rapid expansion,it will be $75 million.What is the expected NPV of the project?
A)$57.5 million
B)$49 million
C)$46.67 million
D)$45 million

Accepted Answer

The expected NPV can be calculated by multiplying each outcome by its probability and summing these products: (0.20 * $20 million) + (0.50 * $45 million) + (0.30 * $75 million) = $4 million + $22.5 million + $22.5 million = $49 million.

Question 5

When Charles River Publisher's sales revenue increased from $25 million to $27.5 million,net operating income increased from $3,750,000 to $3,937,500.What is Quineboag's degree of operating leverage (DOL)?
A).5
B)2
C)6.67
D).05

Accepted Answer

The answer of When Charles River Publisher's sales revenue increased...

Question 6

Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each.It believes that unit sales will grow between -5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2013 if the number of units sold increases by 5% per year and prices remain flat.
A)$2,880,000
B)$3,168,000
C)$3,333,960
D)$3,175,200

Accepted Answer

The answer of Enchanted Hearth expects to sell 1,200 wood...

Question 7

When Quineboag Textile's sales revenue increased from $5.0 million to $5.25 million,net operation income increased from $500,000 to $575,000.What is Quineboag's degree of operating leverage (DOL)?
A).015
B).33
C)3.00
D)10

Accepted Answer

DOL = % change in net operating income / % change in sales revenue

% change in net operating income = (575,000 - 500,000) / 500,000 = 0.15 or 15%

% change in sales revenue = (5,250,000 - 5,000,000) / 5,000,000 = 0.05 or 5%

DOL = 15% / 5% = 3.00

Question 8

Use the following information to answer the following question(s).
Orange Electronics projects sales of its new O-Phones for next year at 10,000 units priced at $150 each.The variable costs of an O-Phone are expected to be $75.Fixed cash costs are expected to be $150,000 and depreciation $100,000.The tax rate is 40%.Orange believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%.
-What is the expected net operating profit after tax (NOPAT)for the worst case scenario?
A)$300,000
B)$223,500
C)$174,000
D)$124,500

Accepted Answer

The answer of Use the following information to answer the...

Question 9

Boulangerie Bouffard expects to sell 1.25 million croissants next year for $1.50 each.Variable cost of a croissant is $0.80.Fixed costs are $150,000,depreciation $200,000 and the tax rate is 34%.If the bakery can increase the price of a croissant to $1.75 sales will fall by 50,000 croissants.All other things equal,operating cash flow will increase or decrease
A)$300,000 increase.
B)$148,500 increase.
C)$148,500 decrease.
D)$174,900 increase.

Accepted Answer

First, let's calculate the current operating cash flow:
Revenue = 1.25 million croissants * $1.50 per croissant = $1,875,000
Variable Cost = 1.25 million croissants * $0.80 per croissant = $1,000,000
Fixed Cost = $150,000 + $200,000 = $350,000
Depreciation = $200,000
EBIT = Revenue - Variable Cost - Fixed Cost - Depreciation = $325,000
Taxes = 0.34 * EBIT = $110,500
Operating Cash Flow = EBIT - Taxes = $214,500

Now, let's calculate the operating cash flow if the price increases to $1.75 and 50,000 croissants are not sold:
New Revenue = (1.25 million - 50,000) croissants * $1.75 per croissant = $1,818,750
New Variable Cost = (1.25 million - 50,000) croissants * $0.80 per croissant = $920,000
New Fixed Cost = $350,000
Depreciation = $200,000
New EBIT = New Revenue - New Variable Cost - New Fixed Cost - Depreciation = $348,750
Taxes = 0.34 * New EBIT = $118,395
New Operating Cash Flow = New EBIT - Taxes = $230,355

Therefore, the operating cash flow will increase by $15,855 ($230,355 - $214,500), which is closest to option D.

Question 10

Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each.Variable cost of a croissant is $0.75.Fixed costs are $150,000,depreciation $200,000 and the tax rate is 25%.If the bakery can increase the price of a croissant to $1.50 and all other variables remain the same,free cash flow will increase by
A)$37,500.
B)$150,000.
C)$187,500.
D)$250,000.

Accepted Answer

First, let's calculate the current free cash flow:

Revenue = 1,000,000 x $1.25 = $1,250,000
Variable Costs = 1,000,000 x $0.75 = $750,000
Fixed Costs = $150,000 + $200,000 = $350,000
Operating Income = $1,250,000 - $750,000 - $350,000 = $150,000
Taxes = $150,000 x 0.25 = $37,500
Free Cash Flow = $150,000 - $37,500 = $112,500

Now, let's calculate the new free cash flow if the price of a croissant is increased to $1.50:

Revenue = 1,000,000 x $1.50 = $1,500,000
Variable Costs = 1,000,000 x $0.75 = $750,000
Fixed Costs = $150,000 + $200,000 = $350,000
Operating Income = $1,500,000 - $750,000 - $350,000 = $400,000
Taxes = $400,000 x 0.25 = $100,000
Free Cash Flow = $400,000 - $100,000 = $300,000

The increase in free cash flow is therefore: $300,000 - $112,500 = $187,500.

Therefore, the best choice is C, which is $187,500.

Question 11

________ is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.
A)Project standing alone risk
B)Decision tree analysis
C)Scenario analysis
D)Real Options

Accepted Answer

Scenario analysis involves analyzing the potential outcomes of a project under different scenarios or conditions. This technique is useful in assessing the risks associated with a project and determining the best course of action. By comparing the best-case and worst-case scenarios with the expected value, managers can make informed decisions about how to proceed. This approach provides a more comprehensive picture of the potential outcomes of a project and helps to identify ways to mitigate risks or capitalize on opportunities.

Question 12

There is a 30% probability that an office building will be sold after 5 years for $30 million,a 50% probability that it will be sold for $20 million and a 20% probability that it will be sold for $10 million.What is the expected value of the office building in 5 years?
A)$20 million
B)$21 million
C)$30 million
D)$10 million

Accepted Answer

We need to find the expected value, which is the weighted average of the values and their probabilities. 
Expected value = (0.3 * 30) + (0.5 * 20) + (0.2 * 10) 
Expected value = 9 + 10 + 2 
Expected value = 21 million. 
Therefore, the best choice is option B.

Question 13

Use the following information to answer the following question(s).
Orange Electronics projects sales of its new O-Phones for next year at 10,000 units priced at $150 each.The variable costs of an O-Phone are expected to be $75.Fixed cash costs are expected to be $150,000 and depreciation $100,000.The tax rate is 40%.Orange believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%.
-What is the expected net operating profit after tax (NOPAT)if the most likely estimates are used?
A)$493,500
B)$330,000
C)$300,000
D)$124,500

Accepted Answer

The expected NOPAT is calculated as follows: 
Revenue - Operating Expenses - Depreciation = Earnings Before Interest and Taxes (EBIT) 
EBIT * (1 - Tax Rate) = NOPAT

Using the most likely estimates: 
Revenue = $1,500,000 
Operating Expenses = $900,000 
Depreciation = $300,000 
EBIT = $300,000 
Tax Rate = 40%

$300,000 * (1 - 0.4) = $180,000 
Therefore, the expected NOPAT is $180,000 or C.

Question 14

Rheem Manufacturing Co.anticipates that cash flows from home heating fuel sales next year will be $800,000 if the winter is mild,$1,000,000 if winter is average,and $1,500,000 if winter is exceptionally cold.The probability of an average winter is 60%,while the probability of either a mild or an exceptionally cold winter is 20%.What is Rheem's expected cash flow from fuel sales next winter?
A)$1,060,000
B)$1,100,000
C)$1,000,000
D)$1,150,000

Accepted Answer

Expected cash flow = (0.20 x $800,000) + (0.60 x $1,000,000) + (0.20 x $1,500,000) = $1,060,000

Question 15

Which of the following is considered the major risk when analysing projects in a multinational environment?
A)Currency fluctuations
B)Inflation
C)Political risk
D)Lack of available betas

Accepted Answer

Currency fluctuations are a major risk in multinational projects as they can significantly impact the cash flows and profitability due to changes in exchange rates.

Question 16

An appropriate tool to analyse the interaction of various value drivers for Orange Electronics would be
A)simulation analysis.
B)sensitivity analysis.
C)scenario analysis.
D)either A or C

Accepted Answer

Both simulation analysis and scenario analysis are appropriate tools to analyse the interaction of various value drivers for Orange Electronics. Simulation analysis involves creating a model of the business and testing different scenarios or assumptions to see how they impact the overall value of the company. Scenario analysis involves examining different possible futures for the business and identifying potential risks and opportunities. Both approaches would be useful for Orange Electronics to understand how different factors such as changes in market conditions, pricing strategies, or investment decisions could affect the company's valuation.

Question 17

Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each.It believes that unit sales will grow between -5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2013 if both price and the number of units sold increase by 5% per year.
A)$3,492,720
B)$3,500,658
C)$3,333,960
D)$3,175,200

Accepted Answer

To calculate the forecasted sales revenue for 2013, we need to use the following formula:

Forecasted sales revenue for 2013 = (Actual sales revenue in 2011) x (1 + annual growth rate in units) x (1 + annual growth rate in price)

Actual sales revenue in 2011 = 1,200 x $2,400 = $2,880,000

Annual growth rate in units = between -5% and +5% per year, or an average of 0% per year

Annual growth rate in price = between -5% and +5% per year, or an average of 0% per year

Therefore, the forecasted sales revenue for 2013 is:

$2,880,000 x (1 + 0%) x (1 + 5%) = $3,500,658

Therefore, the best choice is B.

Question 18

Use the following information to answer the following question(s).
Destroya Extermination Services projects next year's sales of its new X-Ray termite inspection service at 5,000 inspections priced at $175 each.The variable costs per inspection are expected to be $87.50.Fixed cash costs are expected to be $90,000 and depreciation $110,000.The company's marginal tax rate is 34%.Destroya believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%.
-What is the expected free cash flow if the most likely estimates are used?
A)$156,750
B)$266,750
C)$237,500
D)$383,240

Accepted Answer

The answer of Use the following information to answer the...

Question 19

Use the following information to answer the following question(s).
Orange Electronics projects sales of its new O-Phones for next year at 10,000 units priced at $150 each.The variable costs of an O-Phone are expected to be $75.Fixed cash costs are expected to be $150,000 and depreciation $100,000.The tax rate is 40%.Orange believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%.
-What is the expected net operating profit after tax (NOPAT)for the best case scenario?
A)$493,500
B)$330,000
C)$394,500
D)$124,500

Accepted Answer

NOPAT is calculated as operating income (or earnings before interest and taxes - EBIT) minus taxes. The best case scenario would imply the highest NOPAT among the given options, which is $493,500.

Question 20

Scenario analysis is the form of risk analysis
A)that examines the relationship between total firm cash flows and the NPV of a particular project.
B)that examines the volatility of NPV.
C)that examines the impact of key variables such as sales or costs in various combinations.
D)that examines the impact of key variables such as sales or costs one at a time.

Accepted Answer

Scenario analysis examines the impact of key variables such as sales or costs in various combinations. It looks at multiple potential scenarios to determine how the project or investment may perform under different circumstances, allowing for a more comprehensive understanding of potential risks and opportunities.

Quiz 13: Risk Analysis and Project Evaluation

The form of risk analysis that examines the effect of various combinations of value drivers is known as

Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate?

When Charles River Publisher's sales revenue increased from $25 million to $27.5 million,net operating income increased from $3,750,000 to $3,937,500.What is Quineboag's degree of operating leverage (DOL) ?

When Quineboag Textile's sales revenue increased from $5.0 million to $5.25 million,net operation income increased from $500,000 to $575,000.What is Quineboag's degree of operating leverage (DOL) ?

________ is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.

There is a 30% probability that an office building will be sold after 5 years for $30 million,a 50% probability that it will be sold for $20 million and a 20% probability that it will be sold for $10 million.What is the expected value of the office building in 5 years?

Which of the following is considered the major risk when analysing projects in a multinational environment?

An appropriate tool to analyse the interaction of various value drivers for Orange Electronics would be

Scenario analysis is the form of risk analysis