Question 1

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's approach of analyzing each project using the most optimistic, realistic, and pessimistic values for each variable falls under the purview of scenario analysis, which is a technique used to evaluate the potential outcomes of various future events or situations. Sensitivity analysis is a tool used to evaluate the effect of changes in one variable on the outcome of a particular project, whereas break-even analysis helps to determine the point at which the total cost of a product or service becomes equal to its total revenue. Forecasting research involves predicting future trends or market conditions, while competitive analysis involves monitoring and assessing the strengths and weaknesses of rival firms.

Question 2

Total costs _____________________.

Accepted Answer

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

Question 3

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 4

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

The additional analysis of actions that management could take if a project encounters certain situations after it is implemented is referred to as contingency planning, where the goal is to identify potential risks and develop a plan to minimize their impact on the project.

Question 5

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

Accepted Answer

Scenario analysis involves creating different hypothetical situations or scenarios to examine the potential outcomes and risks associated with a project. This would include examining a worst case scenario. Sensitivity analysis involves identifying the key variables that affect a project's outcomes and testing how changes in these variables would impact the project. Base-case analysis involves examining a single, most likely scenario for a project. Simulation analysis involves creating a model to simulate different scenarios and outcomes. Multiple-outcome analysis involves examining a range of possible outcomes for a project. While some of these other techniques may also be used to identify a worst case scenario, scenario analysis is the most likely choice.

Question 6

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

Setting the price equal to marginal cost ensures that the company is covering all its variable costs and is not losing money on the sale of additional units. This also allows the company to generate additional revenue and potentially attract new customers without affecting their overall profits. The other options (average variable cost, average total cost, average total revenue, and marginal revenue) do not consider all the costs associated with producing the additional units and may lead to losses for the company.

Question 7

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 best method to determine how changes in price affect a project's NPV and IRR by analyzing the sensitivity of the project's outcome to changes in price. It involves changing one variable at a time to see its effect on the project's outcome. Scenario analysis involves creating multiple scenarios where different variables are changed at the same time, base-case analysis only considers the most likely outcome, simulation analysis uses statistical models to generate multiple possible outcomes, and multiple-outcome analysis considers multiple possible outcomes simultaneously.

Question 8

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 base case is the initial estimate or projection used as a starting point for what-if analysis. It represents the most likely or expected scenario for the project. Therefore, C is the best choice. A, B, D, and E are not commonly used terms in finance for the initial estimate in what-if analysis.

Question 9

Sensitivity analysis is conducted by:

Accepted Answer

Sensitivity analysis involves changing the value of a single variable to observe the resulting change in the current value of a project. This can help managers understand the impact of changes in a particular factor on the overall project outcome. Holding all variables at their base level and changing the required rate of return (A) is a type of scenario analysis, changing the value of two variables to determine interdependency (B) is called two-way sensitivity analysis, assigning best or worst possible value to each variable (D) is referred to as extreme-scenario analysis, and managers conducting analysis after a project has been implemented (E) is known as post-mortem analysis.

Question 10

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 analyze the effect of changes in one variable on the outcome of the project. By conducting sensitivity analysis, we can determine how much impact the accuracy of the variable cost estimate will have on the final outcome of the project. It helps in identifying the most critical variables and the extent to which their changes may affect the project's outcome. Thus, sensitivity analysis is the best choice in this case.

Question 11

Variable costs _________________________.

Accepted Answer

Variable costs change depending on the quantity of output produced. As more output is produced, variable costs increase and vice versa.

Question 12

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 13

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

Accepted Answer

Hard rationing occurs when a company is unable to raise any capital for new projects, regardless of the circumstances.

Question 14

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

Accepted Answer

Marginal costs result from a small change in output, whereas fixed costs remain the same regardless of output. Average costs are the total cost divided by the quantity produced and incremental costs refer to the additional cost incurred when making a change in production. Product costs refer to the cost of materials and labor involved in producing a product.

Question 15

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 16

Fixed costs __________________________.

Accepted Answer

Fixed costs are expenses that do not change with the quantity of output produced. They remain constant for a given time period, regardless of the level of production.

Question 17

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 analysis will help determine the minimum number of units that need to be sold to cover costs, while sensitivity analysis will show the impact of changes in variables such as price or production costs on sales projections. By combining the two, a more realistic and accurate sales projection can be made. Payback analysis and operating leverage analysis are not as useful in testing sales projections, as they mainly focus on financial viability and risk. IRR analysis can be helpful, but it does not directly address the uncertainty surrounding sales projections.

Question 18

Conducting scenario analysis helps managers see the:

Accepted Answer

Scenario analysis allows managers to consider the potential range of outcomes from a proposed project, including best-case and worst-case scenarios, in order to make more informed decisions and mitigate risks.

Question 19

Marginal costs _____________________.

Accepted Answer

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

Question 20

Average total cost:

Accepted Answer

Average total cost is the summation of average fixed cost and average variable cost.

Quiz 11: Project Analysis and Evaluation

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: