Question 1

The point where a project produces a rate of return equal to the required return is known as the:

Accepted Answer

The point where a project produces a rate of return equal to the required return is known as the financial break-even point. It is the point where the project starts making profits and covers all of its operating and financing costs.

Question 2

If you are contrasting the most optimistic situation to the most pessimistic situation which might be created by a project you are conducting _____ analysis.

Accepted Answer

Scenario analysis is a technique used in project management to assess the potential outcomes of different situations. It involves creating scenarios for different levels of risk and assessing the impact on the project. By comparing the most optimistic scenario with the most pessimistic scenario, project managers can better understand the risks associated with a project and plan accordingly. Choice A, Sensitivity analysis, is a technique used to examine how changes in one variable affect the outcome of a project. Choice C, Accounting break-even, D, Financial break-even, and E, Cash break-even, are all financial analysis techniques that assess the financial viability of a project, but they do not specifically address the potential outcomes of different scenarios.

Question 3

Which one of the following statements about costs is correct?

Accepted Answer

A decrease in total fixed costs reduces the overall expenses of a project, thereby increasing its net present value, assuming all other factors remain constant.

Question 4

Which of the following statements is accurate?

Accepted Answer

The relation between project life and payback period does not provide direct information about the Net Present Value (NPV) of a project. NPV is calculated based on the present value of cash inflows and outflows over the project's life, and a project can have a positive NPV even if its payback period is longer than its life, or vice versa.

Question 5

The sales level that results in a project's net income exactly equal to zero is called:

Accepted Answer

The sales level that results in a project's net income exactly equal to zero is called accounting break-even. This means that all costs, both variable and fixed, have been fully covered by the revenue generated, resulting in zero profit or loss. It is important for a business to know its accounting break-even point to determine if the project or investment is actually feasible or not.

Question 6

The NPV computed using static DCF analysis is _________ if the project gives us the opportunity
to abandon the project if things go poorly; that is, it includes an option to abandon.

Accepted Answer

The presence of an option to abandon the project if things go poorly reduces the downside risk of the project. Therefore, the NPV computed using static DCF analysis will be understated because it does not account for the reduced downside risk.

Question 7

When you apply the highest sales price and the lowest costs in a project analysis, you are constructing:

Accepted Answer

When you apply the highest sales price and the lowest costs, you are assuming the most favorable conditions for the project. This is known as a best case scenario.

Question 8

The NPV computed using static DCF analysis is _________ if the project gives us the opportunity
to invest additional funds if things go well; that is, it includes an option to expand.

Accepted Answer

The NPV computed using static DCF analysis can be understated if the project provides the opportunity to invest additional funds if things go well (option to expand). This is because the static DCF analysis assumes a fixed set of cash flows and does not consider the flexibility of expanding the project if it proves to be profitable. Therefore, the true value of the project is higher than what is indicated by the static DCF analysis.

Question 9

The sales level that results in a project operating cash ﬂow exactly equal to zero is called:

Accepted Answer

The sales level that results in a project operating cash flow exactly equal to zero is called the cash break-even point. This means that at this level of sales, the project is generating just enough cash inflow to cover its cash outflows, including expenses and investments.

Question 10

Sensitivity analysis is the term used to describe the process of examining the effects on the net present value of a project when:

Accepted Answer

Sensitivity analysis involves changing a single variable to see its impact on the net present value of a project. This helps in identifying the most significant factors that affect the project's profitability and helps in making informed decisions about the project. Therefore, choice E is the best option as it describes the process of sensitivity analysis accurately.

Question 11

Forecasting risk emphasizes the point that the soundness of any management decision based on the net present value of a proposed project is highly dependent upon the:

Accepted Answer

Forecasting risk highlights the importance of accurate cash flow projections in determining the net present value of a project. If the projections are inaccurate, the decision-making process is compromised, and there is a higher likelihood of losses or missed opportunities. The other factors listed may also impact the analysis, but they are not as crucial as the accuracy of cash flow projections.

Question 12

Margerit is reviewing a project with projected sales of 1,500 units a year, a cash ﬂow of $40 a unit and a three-year project life. The initial cost of the project is $95,000. The relevant discount rate is
15 percent. Margerit has the option to abandon the project after one year at which time she feels
She could sell the project for $60,000. At what level of sales should she be willing to abandon the
Project?

Accepted Answer

The answer of Margerit is reviewing a project with projected...

Question 13

Which of the following statements regarding operating leverage is correct?

Accepted Answer

Operating leverage refers to the degree to which a firm uses fixed costs in its operations. All else equal, a firm with high operating leverage will have a higher proportion of fixed costs in its cost structure, which can amplify the impact of changes in sales on profits.

Question 14

The sales level that results in a project net present value exactly equal to zero is called:

Accepted Answer

The sales level that results in a project net present value exactly equal to zero is called the financial break-even. This is because it represents the point at which the project is generating enough cash flow to cover all of its costs, including interest and taxes.

Question 15

If you want to determine the entire range of project outcomes that are reasonably likely to occur you should use _____ analysis.

Accepted Answer

Scenario analysis is the best choice for determining the range of project outcomes that are reasonably likely to occur. This method involves developing multiple possible scenarios with different assumptions and variables to assess the impact on project outcomes. Sensitivity analysis, accounting break-even analysis, financial break-even analysis, and cash break-even analysis are useful for assessing specific aspects of a project, but they do not provide a comprehensive range of potential outcomes.

Question 16

Last month you introduced a new product to the market. Consumer demand has been overwhelming and appears that strong demand will exist over the long-term. Given this situation,
Management should consider the option to:

Accepted Answer

With overwhelming consumer demand and strong potential for long-term demand, management should consider expanding the product's production and marketing to meet the demand and take advantage of the opportunity for growth and profitability. Suspend, abandon, contract, or withdraw would not be appropriate options in this situation.

Question 17

A farmer near Medicine Hat hires a grain harvesting crew from Saskatchewan to harvest his wheat at the end of each summer. Because the crop yield varies from year to year, the crew charges the
Farmer according to the number of bushels actually harvested each year. For capital budgeting
Purposes, the harvesting charges should be classiﬁed as

Accepted Answer

The harvesting charges are a variable cost because they depend on the number of bushels harvested. If no bushels are harvested, no payment is made.

Question 18

Which of the following would most likely be considered a ﬁxed cost for a given time period?

Accepted Answer

A fixed cost is a cost that remains constant, regardless of the level of production or sales. The salary of the Chief Financial Officer is a fixed cost as it remains the same irrespective of the amount of sales or production.

Question 19

Which of the following would likely be considered a variable cost for a given time period?

Accepted Answer

Sales commissions are typically based on the amount of sales generated in a given time period and therefore would likely be considered a variable cost. The other options are either fixed costs (B and E) or not enough information is given to determine if they are variable or fixed (C and D).

Question 20

To determine the degree to which the projected net present value of a project is dependent upon a single variable you should conduct _____ analysis.

Accepted Answer

Sensitivity analysis is used to determine how much the projected net present value of the project will change based on changes in a single variable. This helps to identify which variables have the greatest impact on the project and allows for contingency planning. Scenario analysis is similar but involves changing multiple variables at once, and the other options listed are not directly related to analyzing the impact of a single variable on the net present value of a project.

Quiz 11: Project Analysis and Evaluation