Question 1

Variable costs _____________.

Accepted Answer

Variable costs change as a function of the quantity of output produced because they vary with the level of production, such as costs for materials and labor directly involved in production.

Question 2

All else constant, the accounting break-even level of sales will decrease when the:

Accepted Answer

The accounting break-even level of sales decreases when depreciation expense decreases because depreciation is a non-cash expense that reduces taxable income, thereby reducing the total amount of cash needed to cover expenses and reach break-even.

Question 3

Your company's scientists have developed an exciting new product that is unlike anything presently available to consumers. The NPV of bringing the product to market is positive yet you are uncertain about the sales projections. The best way for you to test the validity of the sales projections is to use:

Accepted Answer

Break-even and sensitivity analysis are the best methods to test the validity of sales projections. Break-even analysis helps determine the point at which the product becomes profitable, which is crucial for understanding the sales needed to cover costs. Sensitivity analysis examines how changes in sales projections affect the project's profitability, providing insight into the potential risks and uncertainties associated with the sales forecasts.

Question 4

You want to determine how changes in the price of a product affect a project's NPV and IRR. To best determine the impact, you would most likely use ____________.

Accepted Answer

Sensitivity analysis is the most appropriate tool for assessing how changes in a single input variable, such as the price of a product, affect the outcome measures like NPV (Net Present Value) and IRR (Internal Rate of Return). It helps in understanding the sensitivity of the project's financial viability to changes in key assumptions.

Question 5

Management wants to offer a "Thank You" sale to its customers by offering to sell additional units of a product at the lowest price possible without affecting their profits. The price management charges for these one-time sale units should be set equal to the:

Accepted Answer

To maintain profitability while offering a sale, the price should be set equal to the marginal cost. This ensures that the cost of producing one more unit is covered, without affecting overall profits.

Question 6

The Delta Mare Co. has received requests from each of the departments within the company for capital investment funds for next year. The management of Delta Mare decides to allocate the available funds based on the net present value (NPV) of each proposal starting with the highest NPV first. Management is following a practice known as _____ rationing.

Accepted Answer

The answer of The Delta Mare Co. has received requests...

Question 7

Costs that result from a small change in output are called ___________.

Accepted Answer

Marginal costs refer to the additional costs incurred when producing one more unit of output.

Question 8

Marginal costs _____________________.

Accepted Answer

Marginal costs change as a function of the next unit of output produced.

Question 9

To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably conduct _____ analysis.

Accepted Answer

Sensitivity analysis is used to determine how different values of an independent variable affect a particular dependent variable under a given set of assumptions. In the context of project management, it helps in understanding how changes in variable costs can impact the final outcome of the project.

Question 10

Hard rationing is defined as the situation that exists when a company:

Accepted Answer

Hard rationing occurs when a company is unable to raise capital for new projects under any circumstances, indicating a severe constraint on funding availability.

Question 11

If you see a worst-case scenario for a project, the analyst is likely using ______________.

Accepted Answer

Scenario analysis is used to evaluate the potential outcomes of a project under various specific conditions, including worst-case scenarios. This helps in understanding the impact of different factors on the project's success or failure.

Question 12

The Better Bilt Co. is fairly cautious when considering new projects and therefore analyzes each project using the most optimistic, the most realistic, and the most pessimistic value for each variable. The company is conducting:

Accepted Answer

The Better Bilt Co. is conducting scenario analysis by evaluating projects under different scenarios: the most optimistic, the most realistic, and the most pessimistic. This approach helps in understanding the potential outcomes and risks associated with each project under varying conditions.

Question 13

In previous chapters, we calculated NPV based on a project's forecast cash flows. When doing what-if analysis, this initial estimate is called the ______________.

Accepted Answer

The initial estimate of NPV based on forecast cash flows during what-if analysis is referred to as the "Base case." This serves as the standard or reference point for comparing other scenarios.

Question 14

The process in which a business allocates a certain amount of financing for capital spending to each business unit is called:

Accepted Answer

The answer of The process in which a business allocates...

Question 15

As part of your project analysis, you also review various actions that management could take if a project encounters certain situations after it is implemented. This additional analysis is referred to as _____ planning.

Accepted Answer

Contingency planning involves preparing for possible future situations or changes in conditions, including how to respond to them, which aligns with the description given.

Question 16

Average total cost:

Accepted Answer

Average total cost (ATC) is indeed the sum of average fixed cost (AFC) and average variable cost (AVC), which is calculated for any given level of output by dividing the total cost (fixed and variable costs combined) by the quantity of output produced.

Question 17

Fixed costs __________________________.

Accepted Answer

Fixed costs are costs that do not change with the level of output produced. They remain constant over a specified period of time, regardless of the quantity of goods or services produced.

Question 18

Sensitivity analysis is conducted by:

Accepted Answer

Sensitivity analysis involves changing the value of one variable at a time to see how it affects the outcome or value of a project, which is accurately described in option C.

Question 19

Total costs _____________________.

Accepted Answer

Total costs comprise the sum total of all production expenses of the firm for some time period.

Question 20

Conducting scenario analysis helps managers see the:

Accepted Answer

Scenario analysis allows managers to evaluate the potential range of outcomes from a proposed project by considering different scenarios, including best-case, worst-case, and most likely scenarios. This helps in understanding the variability in potential outcomes and in making informed decisions.

Quiz 11: Project Analysis and Evaluation