Question 1

Chevre Imported Cheese forecasts that if sales revenue for next year is $1,250,000,net operating income will be $100,000 and if sales revenue is $1,000,000,net operating income will be $80,000.Chevre's degree of operating leverage is

Accepted Answer

The answer of Chevre Imported Cheese forecasts that if sales...

Question 2

Dudster company's DOL is 2.If sales increase by 10%,NOI will increase by 5%.

Accepted Answer

With a Degree of Operating Leverage (DOL) of 2, if sales increase by 10%, NOI (Net Operating Income) will increase by 20% (10% * 2 = 20%), not 5%.

Question 3

The NPV break-even point means that a company has covered its cost of capital.

Accepted Answer

The NPV break-even point is the point where the net present value of a project equals zero, indicating that the project has generated exactly enough cash flows to cover its initial investment and the cost of capital required by investors. Therefore, if a company has reached the NPV break-even point, it has covered its cost of capital.

Question 4

For a line of leaf blowers sold by Enviro Equipment,fixed costs,including depreciation of $1,000,000,total $2,400,000.The leaf blowers sell for $800 each.Variable costs of a snow blower are $500.Compute
a.accounting break-even.
b.cash break-even

Accepted Answer

The answer of For a line of leaf blowers sold...

Question 5

Use the following information to answer the following question(s).
Enrico,the owner of a pizza shop near a large university campus,is considering opening a shop specialising in quick,inexpensive take-away meals that are low in fat and calories.He will use a vacant space adjacent to the pizza shop.Assume that the project requires an initial cash outlay of $100,000.Finance students from the university have taken on the project as a course assignment.They believe that there is a 50% chance that the project will have modest success and return $11,000 per year for the foreseeable future (a perpetuity).On the other hand,there is a 50% chance that the project will be highly successful and produce returns of $20,000 per year in perpetuity.If the restaurant is modestly successful,Enrico will keep it open,but not expand.If it is well received,he will immediately open 2 more shops at sites close to the sprawling campus.The additional shops would have approximately the same cash flow as the first.Cash flows will be discounted at 10%.
-What is the NPV of the project if it is expanded?

Accepted Answer

According to the information given, the NPV of the project is currently $200,000. If the project is expanded, the additional cost will be $500,000 and the NPV will increase by $100,000. Therefore, the new NPV will be $300,000. Option C is the best choice as it represents the highest NPV.

Question 6

Real options can have the effect of

Accepted Answer

Real options can increase a project's NPV by allowing the company to take advantage of future opportunities that may arise. They can also reduce a project's risk by providing flexibility and the ability to make strategic decisions based on changing market conditions. Additionally, real options can provide valuable information about potential future opportunities, allowing companies to make more informed decisions. Therefore, all of the choices (A, B, and C) are correct.

Question 7

If a project reaches the accounting break-even point in every year of its life,it must also have a positive NPV.

Accepted Answer

Reaching the accounting break-even point only means that the project's revenues cover its operating costs and depreciation, not that it necessarily generates a return above the cost of capital, which is required for a positive NPV.

Question 8

Use the following information to answer the following question(s).
An alternative energy project will cost $300,000.Depending on the price of electricity,the project will create after-tax savings of either $100,000 per year for 5 years or $75,000 per year for 5 years.If first year savings are only $75,000,the project can be sold at the end of the first year for $250,000.Use a discount rate of 10%.
-What is the NPV of the project if first year savings are only $75,000 and the project is not sold?

Accepted Answer

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

Question 9

Break-even NPV means that the expected rate of return on a project is equal to the required rate of return.

Accepted Answer

Break-even NPV occurs when the present value of cash inflows from a project is equal to the present value of cash outflows, resulting in a net present value of zero. At this point, the expected rate of return on the project equals the required rate of return.

Question 10

Accounting break-even means that the company is able to pay its interest expense and also the dividends shareholders were expecting.

Accepted Answer

Accounting break-even refers to the point at which a company's total revenue equals its total expenses, including both fixed and variable costs. It does not necessarily mean the company is able to pay its interest expense and dividends, as those depend on the company's financing and dividend policies.

Question 11

Use the following information to answer the following question(s).
Enrico,the owner of a pizza shop near a large university campus,is considering opening a shop specialising in quick,inexpensive take-away meals that are low in fat and calories.He will use a vacant space adjacent to the pizza shop.Assume that the project requires an initial cash outlay of $100,000.Finance students from the university have taken on the project as a course assignment.They believe that there is a 50% chance that the project will have modest success and return $11,000 per year for the foreseeable future (a perpetuity).On the other hand,there is a 50% chance that the project will be highly successful and produce returns of $20,000 per year in perpetuity.If the restaurant is modestly successful,Enrico will keep it open,but not expand.If it is well received,he will immediately open 2 more shops at sites close to the sprawling campus.The additional shops would have approximately the same cash flow as the first.Cash flows will be discounted at 10%.
-What is the expected NPV of the project with the option to expand?

Accepted Answer

The expected NPV of the project can be calculated as follows:

Expected NPV = (0.5 x $11,000) / (0.1) + (0.5 x $20,000) / (0.1) - $100,000 
Expected NPV = $110,000 + $200,000 - $100,000 
Expected NPV = $210,000

However, Enrico has the option to expand if the project is well received. In this case, he will open two more shops with the same cash flow as the first.

If Enrico decides to expand, he will need an initial cash outlay of $200,000 ($100,000 per additional shop). Therefore, the expected NPV of the project with the option to expand can be calculated as follows:

Expected NPV = (0.5 x $11,000) / (0.1) + (0.5 x $20,000) / (0.1) - $100,000 + (0.5 x $20,000) / (0.1) - $200,000

Expected NPV = $110,000 + $200,000 - $100,000 + $100,000 - $200,000 
Expected NPV = $110,000

Therefore, the expected NPV of the project with the option to expand is $110,000.

Since the expected NPV ($110,000) is positive, taking on the project is the best choice. The project has a positive expected return and is expected to create value for the owner.

Question 12

Gardner Furniture Co.has calculated its degree of operating leverage as 3.5.If Gardner can increase sales revenue by 5%,net operating income should increase by

Accepted Answer

The degree of operating leverage (DOL) is calculated by dividing the percentage change in net operating income (NOI) by the percentage change in sales revenue. DOL = % change in NOI / % change in sales revenue. 
Given DOL = 3.5 and % change in sales revenue = 5%, we can calculate the % change in NOI as follows: 
DOL = % change in NOI / % change in sales revenue 
3.5 = % change in NOI / 5% 
% change in NOI = 3.5 * 5% = 17.5%
Therefore, if Gardner can increase its sales revenue by 5%, its net operating income should increase by 17.5%. The correct answer is B.

Question 13

If the worst case scenario for a project results in an NPV of zero,the project should be accepted.

Accepted Answer

If the worst case scenario results in an NPV of zero, it means that the project is neither making a profit nor incurring a loss. Therefore, accepting the project would still result in breaking even or recovering all costs, making it a viable option.

Question 14

Bill's Boat Charters forecasts indicate that if boat $500,000,net operating income will be $25,000 and if rentals equal $525,000,net operating income will be $37,500.What is Bill's degree of operating leverage?

Accepted Answer

Degree of operating leverage (DOL) = % change in net operating income / % change in sales

% change in net operating income = ($37,500 - $25,000) / $25,000 = 0.5 or 50%
% change in sales = ($525,000 - $500,000) / $500,000 = 0.05 or 5%

DOL = 50% / 5% = 10

Therefore, the answer is B) 10.

Question 15

Actual 2014 figures and forecasted 2015 figures are shown below for HEMOPath Labs.
  Compute HEMOPath's degree of operating leverage (DOL).

Accepted Answer

The answer of Actual 2014 figures and forecasted 2015 figures...

Question 16

A project's internal rate of return and the company's required rate of return were both exactly 12%,therefore the project's NPV was greater than $0.00.

Accepted Answer

When a project's internal rate of return (IRR) exactly matches the company's required rate of return, the net present value (NPV) is zero, not greater than zero.

Question 17

Use the following information to answer the following question(s).
Enrico,the owner of a pizza shop near a large university campus,is considering opening a shop specialising in quick,inexpensive take-away meals that are low in fat and calories.He will use a vacant space adjacent to the pizza shop.Assume that the project requires an initial cash outlay of $100,000.Finance students from the university have taken on the project as a course assignment.They believe that there is a 50% chance that the project will have modest success and return $11,000 per year for the foreseeable future (a perpetuity).On the other hand,there is a 50% chance that the project will be highly successful and produce returns of $20,000 per year in perpetuity.If the restaurant is modestly successful,Enrico will keep it open,but not expand.If it is well received,he will immediately open 2 more shops at sites close to the sprawling campus.The additional shops would have approximately the same cash flow as the first.Cash flows will be discounted at 10%.
-What is the expected NPV of the project with the option to expand if the probability of modest success is revised to 70% and great success to 30%?

Accepted Answer

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

Question 18

Which of the following is a real option with respect to a capital budgeting decision?

Accepted Answer

The answer of Which of the following is a real...

Question 19

Use the following information to answer the following question(s).
Enrico,the owner of a pizza shop near a large university campus,is considering opening a shop specialising in quick,inexpensive take-away meals that are low in fat and calories.He will use a vacant space adjacent to the pizza shop.Assume that the project requires an initial cash outlay of $100,000.Finance students from the university have taken on the project as a course assignment.They believe that there is a 50% chance that the project will have modest success and return $11,000 per year for the foreseeable future (a perpetuity).On the other hand,there is a 50% chance that the project will be highly successful and produce returns of $20,000 per year in perpetuity.If the restaurant is modestly successful,Enrico will keep it open,but not expand.If it is well received,he will immediately open 2 more shops at sites close to the sprawling campus.The additional shops would have approximately the same cash flow as the first.Cash flows will be discounted at 10%.
-What is the project's NPV if success is modest and it is not expanded?

Accepted Answer

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

Question 20

Forecasts for project ST are shown above.Using a discount rate of 10%,the project has a positive NPV of $6,074.69.Estimate within $100 the level of sales revenue that will result in an NPV of $0.00.No other variables will change.

Accepted Answer

The answer of  Forecasts for project ST are shown...

Quiz 13: Risk Analysis and Project Evaluation

Chevre Imported Cheese forecasts that if sales revenue for next year is $1,250,000,net operating income will be $100,000 and if sales revenue is $1,000,000,net operating income will be $80,000.Chevre's degree of operating leverage is

Dudster company's DOL is 2.If sales increase by 10%,NOI will increase by 5%.

The NPV break-even point means that a company has covered its cost of capital.

For a line of leaf blowers sold by Enviro Equipment,fixed costs,including depreciation of $1,000,000,total $2,400,000.The leaf blowers sell for $800 each.Variable costs of a snow blower are $500.Compute a.accounting break-even. b.cash break-even

Real options can have the effect of

If a project reaches the accounting break-even point in every year of its life,it must also have a positive NPV.

Break-even NPV means that the expected rate of return on a project is equal to the required rate of return.

Accounting break-even means that the company is able to pay its interest expense and also the dividends shareholders were expecting.

Gardner Furniture Co.has calculated its degree of operating leverage as 3.5.If Gardner can increase sales revenue by 5%,net operating income should increase by

If the worst case scenario for a project results in an NPV of zero,the project should be accepted.

Bill's Boat Charters forecasts indicate that if boat $500,000,net operating income will be $25,000 and if rentals equal $525,000,net operating income will be $37,500.What is Bill's degree of operating leverage?

Actual 2014 figures and forecasted 2015 figures are shown below for HEMOPath Labs. Compute HEMOPath's degree of operating leverage (DOL).

A project's internal rate of return and the company's required rate of return were both exactly 12%,therefore the project's NPV was greater than $0.00.

Which of the following is a real option with respect to a capital budgeting decision?

Forecasts for project ST are shown above.Using a discount rate of 10%,the project has a positive NPV of $6,074.69.Estimate within $100 the level of sales revenue that will result in an NPV of $0.00.No other variables will change.