Question 1

You have put together a set of cash ﬂow forecasts for a project and have found, on your ﬁrst
calculation, that the NPV is positive. You should accept the project because you are certain to
increase shareholder wealth.

Accepted Answer

A positive NPV does not necessarily guarantee an increase in shareholder wealth. Other factors such as opportunity costs, risks, and market fluctuations should be considered before making a decision to accept the project.

Question 2

Sensitivity analysis allows a ﬁrm to ask what-if type questions in capital budgeting.

Accepted Answer

Sensitivity analysis is a tool used in capital budgeting to determine how changes in different variables can affect the outcome of a project. It allows the firm to ask questions like "what if the cost of raw materials increases?" or "what if demand for the product decreases?" and see how these changes would impact the project's financial performance.

Question 3

Just because the cash ﬂows of a project are positive doesn't mean the NPV is positive.

Accepted Answer

NPV takes into account the time value of money by discounting future cash flows. So, even if the cash flows are positive, if they are received far into the future, their present value may not be enough to offset the initial investment, resulting in a negative NPV.

Question 4

Projected sales is generally least subject to forecasting risk.

Accepted Answer

Projected sales can be subject to forecasting risk due to factors such as changing market conditions, competition, and consumer behavior.

Question 5

The OCF is equal to zero in a ﬁnancial break-even calculation.

Accepted Answer

The answer of The OCF is equal to zero in...

Question 6

The net present value is equal to zero at the accounting break-even point.

Accepted Answer

The net present value (NPV) is a financial metric used to evaluate the profitability of an investment or project, considering the time value of money, whereas the accounting break-even point refers to the point at which total revenues equal total costs, ignoring the time value of money. They measure different concepts and do not necessarily coincide.

Question 7

Scenario analysis allows a ﬁrm to ask what-if type questions in capital budgeting.

Accepted Answer

Scenario analysis involves exploring different possible scenarios and their potential impact on a project or investment. This allows a firm to ask questions like "What if sales are lower than expected?" or "What if interest rates rise?" in order to gain a better understanding of the risks and opportunities associated with a potential investment. Therefore, the statement is true.

Question 8

Simulation analysis allows a ﬁrm to ask what-if type questions in capital budgeting.

Accepted Answer

Simulation analysis enables a firm to hypothetically test various scenarios or assumptions in capital budgeting and determine their potential outcomes.

Question 9

You have put together a set of cash ﬂow forecasts for a project and have found, on your ﬁrst
calculation, that the NPV is positive. You should use scenario or sensitivity analysis to investigate
the project in greater detail.

Accepted Answer

It is recommended to use scenario or sensitivity analysis to examine the project further even if the NPV is positive in the initial calculation. This helps to identify potential risks and uncertainties that could affect the project's profitability.

Question 10

Break-even analysis allows a ﬁrm to ask what-if type questions in capital budgeting.

Accepted Answer

The answer of Break-even analysis allows a ﬁrm to ask...

Question 11

Net income is equal to zero at the accounting break-even point.

Accepted Answer

Accounting break-even point is the level of sales at which a business earns zero profit, which means its net income is equal to zero.

Question 12

You have put together a set of cash ﬂow forecasts for a project and have found, on your ﬁrst
calculation, that the NPV is positive. You should try to identify some source of value in the project.

Accepted Answer

A positive NPV indicates that the cash inflows are greater than the cash outflows and the project is expected to generate a profit. Identifying the source of value can help to further assess the potential success of the project and ensure that it aligns with the organization's goals and objectives.

Question 13

If a project's base case NPV is positive, the project should automatically be accepted.

Accepted Answer

Just because a project's base case NPV is positive, it does not necessarily mean it should be accepted. Other factors, such as the project's cost, risk, and potential impact on existing projects, should also be considered before making a decision.

Question 14

The quantity sold at the accounting break-even point is equal to the total ﬁxed costs divided by the
contribution margin.

Accepted Answer

The answer of The quantity sold at the accounting break-even...

Question 15

The IRR is equal to the required rate of return in a ﬁnancial break-even calculation.

Accepted Answer

The IRR is the rate of return that makes the net present value of cash flows from an investment equal to zero. In other words, it is the rate at which the investment breaks even. Therefore, the IRR is equal to the required rate of return in a financial break-even calculation.

Question 16

Projected ﬁxed costs is generally least subject to forecasting risk.

Accepted Answer

The answer of Projected ﬁxed costs is generally least subject...

Question 17

The discounted payback is equal to the life of the project in a ﬁnancial break-even calculation.

Accepted Answer

The discounted payback period is the amount of time it takes for the present value of the cash inflows from a project to equal the initial investment. In a financial break-even calculation, the discounted payback period is equal to the life of the project because the present value of the cash inflows is equal to the initial investment at that point.

Question 18

You have put together a set of cash ﬂow forecasts for a project and have found, on your ﬁrst
calculation, that the NPV is positive. You should try to assess the degree of forecasting risk that
exists with the project.

Accepted Answer

It is important to assess the degree of forecasting risk that exists with the project even if the initial NPV calculation is positive. This will help in identifying and addressing any potential risks or uncertainties that could impact the future cash flows and ultimately the project's profitability.

Question 19

Initial investment is generally least subject to forecasting risk.

Accepted Answer

Initial investment is the amount of money invested at the beginning of a project or business. Since the amount is already known, it is least subject to forecasting risk. However, forecasting risk increases as the project progresses and future cash flows need to be predicted.

Question 20

The quantity sold at the accounting break-even point is equal to the total ﬁxed costs plus
depreciation divided by the contribution margin.

Accepted Answer

This is the formula for accounting break-even point.

Quiz 11: Project Analysis and Evaluation

You have put together a set of cash ﬂow forecasts for a project and have found, on your ﬁrst calculation, that the NPV is positive. You should accept the project because you are certain to increase shareholder wealth.