Question 1

BASIC INFORMATION: A three-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over the three-year life. The price per unit sold is $20 and the variable cost per
Unit sold is $10. Fixed costs are $30,000 per year.
Using the BASIC INFORMATION only, if you expect to sell 7,000 units per year, what is the OCF in
Year 2 assuming a required return of 15% and a tax rate of 30%?
A) $17,000
B) $20,000
C) $34,000
D) $48,000
E) $55,000

Accepted Answer

To calculate OCF in Year 2, we need to first calculate the annual depreciation expense, which is $60,000/3 years = $20,000 per year.

Next, we can calculate the annual revenue: 7,000 units per year x $20 per unit = $140,000.

Variable costs will be: 7,000 units per year x $10 per unit = $70,000.

Fixed costs are given as $30,000 per year.

So, the pre-tax profit for Year 2 is: ($140,000 - $70,000 - $30,000 - $20,000) = $20,000.

To calculate OCF, we need to adjust for taxes and add back depreciation:

OCF = ($20,000 x (1-0.3)) + $20,000 = $14,000 + $20,000 = $34,000.

Therefore, the best choice is C.

Question 2

A proposed project has ﬁxed costs of $3,700, depreciation expense of $1,400, and a sales quantity of 1,500 units. What is the contribution margin if the projected level of sales is the accounting break-
Even point?
A) $2.47
B) $2.64
C) $3.10
D) $3.40
E) $3.71

Accepted Answer

The answer of A proposed project has ﬁxed costs of...

Question 3

What is the operating cash ﬂow for a sensitivity analysis using total ﬁxed costs of $20,000?
A) $21,050
B) $23,300
C) $23,950
D) $24,850
E) $25,200

Accepted Answer

The operating cash flow for a sensitivity analysis can be calculated as follows: 
Operating cash flow = EBIT + Depreciation - Taxes 
Given that total fixed costs are $20,000, the variable costs will change based on the sensitivity analysis. Without data on the changes in variable costs or revenue, we cannot calculate EBIT or taxes. Therefore, we cannot determine the exact operating cash flow. However, we can determine which answer choice is the closest approximation using the given information. 
For option C, the operating cash flow is calculated as follows: 
EBIT = $23,950 
Depreciation and taxes are not given, so we cannot make any assumptions about them. 
Thus, the closest approximation to the operating cash flow with total fixed costs of $20,000 is $23,950, which is option C.

Question 4

A project requires an initial investment of $10,000, straight-line depreciable to zero over four years. The discount rate is 10%. Your tax bracket is 34% and you receive a tax credit for negative earnings
In the year in which the loss occurs. Additional information for variables with forecast error are
Shown below.  What is the worst case NPV for the project?
A) -$11,594
B) -$10,967
C) -$4,423
D) -$2,327
E) +$3,677

Accepted Answer

The answer of A project requires an initial investment of...

Question 5

A project requires an initial investment of $10,000, straight-line depreciable to zero over four years. The discount rate is 10%. Your tax bracket is 34% and you receive a tax credit for negative earnings
In the year in which the loss occurs. Additional information for variables with forecast error are
Shown below.  What is the best case NPV for the project?
A) $5,247
B) $26,462
C) $29,306
D) $32,327
E) $34,252

Accepted Answer

1) Calculate annual depreciation: $10,000/4=$2,500
2) Calculate annual operating income: $5,000
3) Calculate annual taxable income: $5,000-$2,500=$2,500
4) Calculate annual taxes: $2,500*34%=$850
5) Calculate annual after-tax income: $2,500-$850=$1,650
6) Calculate after-tax cash flow (including depreciation): $1,650+$2,500=$4,150
7) Calculate PV of cash flows: 
Year 1: $4,150/(1+10%)^1=$3,773
Year 2: $4,150/(1+10%)^2=$3,430
Year 3: $4,150/(1+10%)^3=$3,119
Year 4: $4,150/(1+10%)^4=$2,838
Total PV of cash flows= $13,160
8) Calculate PV of initial investment: $10,000
9) Calculate NPV: $13,160-$10,000=$3,160
The best case NPV is the highest possible NPV, which occurs when all the forecast errors are in the project's favor (i.e. no negative earnings or cost overruns). Since the only option with a NPV above $3,160 is C) $29,306, that is the best choice.

Question 6

Sam is offering a new product which has a variable cost per unit of $26.08 and total ﬁxed costs of $42,714. What is the selling price of this product if the cash break-even quantity is 6,300 units?
A) $29.47
B) $29.63
C) $32.10
D) $32.86
E) $33.07

Accepted Answer

The answer of Sam is offering a new product which...

Question 7

The Franklin Co. is analyzing a proposed project. The company expects to sell 3,500 units, give or take 15 percent. The expected variable cost per unit is $6 and the expected ﬁxed costs are
$15,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The
Depreciation expense is $6,000. The sales price is estimated at $21 a unit, give or take 3 percent.
The company bases their sensitivity analysis on the base case scenario
What is the amount of the ﬁxed cost per unit under the best case scenario?
A) $3.47
B) $3.66
C) $3.85
D) $4.21
E) $4.43

Accepted Answer

The answer of The Franklin Co. is analyzing a proposed...

Question 8

Taylor and Ashcroft is reviewing a new product with labour cost of $16.40 per unit, raw materials cost of $41.65 a unit, and ﬁxed costs of $164,000 a year. Sales are projected at 85,000 units per
Year over the 3-year life of the product. What is the amount of the total variable costs per year?
A) $3,540,250
B) $3,780,500
C) $4,221,500
D) $4,770,250
E) $4,934,250

Accepted Answer

The answer of Taylor and Ashcroft is reviewing a new...

Question 9

A project has an accounting break-even point of 2,000 units. The ﬁxed costs are $4,200 and the depreciation expense is $400. The projected variable cost per unit is $23.10. What is the projected
Sales price?
A) $20.80
B) $21.00
C) $21.20
D) $25.40
E) $25.60

Accepted Answer

The answer of A project has an accounting break-even point...

Question 10

The company conducts a sensitivity analysis using a variable cost of $8.90 per unit. The total variable costs given this estimate are:
A) $33,820
B) $34,290
C) $35,600
D) $36,400
E) $37,180

Accepted Answer

To calculate the total variable costs, we need to multiply the variable cost per unit by the number of units produced. From the information given, we know that the company produced 4,000 units. Therefore, the total variable costs would be $8.90 x 4,000 = $35,600. Choice C is the only option that matches this calculation.

Question 11

A proposed project has ﬁxed costs of $2,401.50, depreciation expense of $800, and a sales quantity of 950 units. What is the contribution margin if the projected level of sales is the
Accounting break-even point?
A) $3.37
B) $3.42
C) $3.45
D) $3.49
E) $3.52

Accepted Answer

The accounting break-even point is where total revenue equals total costs, including fixed costs and depreciation. The contribution margin per unit is calculated by dividing the sum of fixed costs and depreciation by the sales quantity: ($2,401.50 + $800) / 950 = $3.37.

Question 12

DJ Studios is considering opening a new location. This location is estimated to bring in sales of $398,000 a year with total variable costs of $62,000, total ﬁxed costs of $274,500, and estimated
Unit sales of 1,200. The depreciation expense is $18,900 a year. What is the contribution margin per
Unit?
A) $103
B) $117
C) $280
D) $284
E) $291

Accepted Answer

The answer of DJ Studios is considering opening a new...

Question 13

Using this value, the earnings before interest and taxes will be:
A) $20,000
B) $23,000
C) $28,000
D) $37,000
E) $40,000

Accepted Answer

Earnings before interest and taxes (EBIT) is calculated as revenue minus expenses. In this case, revenue is $40,000 and expenses are $20,000. Therefore, EBIT is $40,000 - $20,000 = $20,000.

Question 14

The Quick Producers Co. is analyzing a proposed project. The company expects to sell 10,000 units, give or take 5 percent. The expected variable cost per unit is $6 and the expected ﬁxed cost
Is $29,000. The ﬁxed and variable cost estimates are considered accurate within a plus or minus 4
Percent range. The depreciation expense is $25,000. The tax rate is 34 percent. The sale price is
Estimated at $13 a unit, give or take 6 percent.
What is the earnings before interest and taxes under the base case scenario?
A) $10,560
B) $16,000
C) $22,440
D) $41,000
E) $66,000

Accepted Answer

First, let's calculate the expected revenue: 
10,000 units x $13/unit = $130,000

Since there is a 6% range on the sale price, the minimum and maximum revenue would be: 
Minimum revenue = $122,200 (10,000 x $12.35) 
Maximum revenue = $137,800 (10,000 x $13.70)

Next, let's calculate the expected variable cost: 
10,000 units x $6/unit = $60,000

Since there is a 5% range on the number of units sold and a 4% range on variable cost, the minimum and maximum variable cost would be: 
Minimum variable cost = $57,000 [(10,000 x 0.95) x ($6 x 0.96)] 
Maximum variable cost = $63,000 [(10,000 x 1.05) x ($6 x 1.04)]

Fixed cost is given as $29,000. Since there is a 4% range on fixed cost, the minimum and maximum fixed cost would be: 
Minimum fixed cost = $27,840 ($29,000 x 0.96) 
Maximum fixed cost = $30,160 ($29,000 x 1.04)

Depreciation expense is given as $25,000.

Now we can calculate the earnings before interest and taxes (EBIT) for the base case scenario:

Minimum EBIT = ($122,200 - $63,000 - $30,160 - $25,000) x (1 - 0.34) = $10,560 
Maximum EBIT = ($137,800 - $57,000 - $27,840 - $25,000) x (1 - 0.34) = $22,440

The best choice would be option B, which is the expected EBIT under the base case scenario, since it falls within the range of minimum and maximum EBIT.

Question 15

A ﬁrm has ﬁxed costs of $30,000 per year, depreciation of $10,000 per year, a price per unit of $50, and an accounting break-even point of 2,000 units. What is the ﬁrm's marginal cost at the
Accounting break-even point?
A) $12
B) $15
C) $20
D) $25
E) $30

Accepted Answer

The answer of A ﬁrm has ﬁxed costs of $30,000...

Question 16

TD, Inc. is analyzing a new project. The data they have gathered to date is as follows:   What are the annual sales under the best-case scenario?
A) $215,460
B) $238,140
C) $264,600
D) $277,200
E) $291,060

Accepted Answer

The answer of TD, Inc. is analyzing a new project....

Question 17

At a production level of 11,200 units a project has total costs of $138,000. The variable cost per unit is $9.84. What is the amount of the total ﬁxed costs if the production level is increased to 14,000
Units? The ﬁrm currently has suﬃcient ﬁxed assets to reach this level of production.
A) $25,183
B) $27,792
C) $29,416
D) $29,987
E) $31,008

Accepted Answer

The answer of At a production level of 11,200 units...

Question 18

What is the operating cash ﬂow for a sensitivity analysis using total ﬁxed costs of $26,000?
A) $19,000
B) $22,960
C) $29,040
D) $31,460
E) $37,540

Accepted Answer

The answer of What is the operating cash ﬂow for...

Question 19

At a production level of 5,600 units a project has total costs of $89,000. The variable cost per unit is $11.20. What is the amount of the total ﬁxed costs if the production level is increased to 6,100
Units without increasing the total ﬁxed assets?
A) $24,126
B) $26,280
C) $27,090
D) $27,820
E) $28,626

Accepted Answer

The answer of At a production level of 5,600 units...

Question 20

The Alfonso Company is analyzing a project with expected sales of 4,000 units, give or take 5 percent. The expected variable cost per unit is $9 and the expected total ﬁxed costs are $17,000.
Cost estimates are considered accurate within a plus or minus 2 percent range. The depreciation
Expense is $3,000. The sale price is estimated at $18 a unit, give or take 5 percent. Sensitivity
Analysis is based on the most likely scenario.
What is the amount of the total variable costs under the best case scenario?
A) $35,280
B) $36,720
C) $37,044
D) $37,918
E) $38,556

Accepted Answer

Under the best case scenario, the company would sell 4,200 units (4,000 + 5% of 4,000). The variable cost per unit is expected to be $9, so the total variable costs would be:
4,200 units x $9 per unit = $37,800

However, cost estimates are accurate within plus or minus 2 percent. So the range of possible variable costs under the best case scenario is:
$37,800 x (1 - 2%) to $37,800 x (1 + 2%)
= $37,044 to $38,556

Therefore, the amount of total variable costs under the best case scenario is $37,044 (choice C).

Quiz 11: Project Analysis and Evaluation

A proposed project has ﬁxed costs of $3,700, depreciation expense of $1,400, and a sales quantity of 1,500 units. What is the contribution margin if the projected level of sales is the accounting break- Even point?

What is the operating cash ﬂow for a sensitivity analysis using total ﬁxed costs of $20,000?

Sam is offering a new product which has a variable cost per unit of $26.08 and total ﬁxed costs of $42,714. What is the selling price of this product if the cash break-even quantity is 6,300 units?

Taylor and Ashcroft is reviewing a new product with labour cost of $16.40 per unit, raw materials cost of $41.65 a unit, and ﬁxed costs of $164,000 a year. Sales are projected at 85,000 units per Year over the 3-year life of the product. What is the amount of the total variable costs per year?

A project has an accounting break-even point of 2,000 units. The ﬁxed costs are $4,200 and the depreciation expense is $400. The projected variable cost per unit is $23.10. What is the projected Sales price?

The company conducts a sensitivity analysis using a variable cost of $8.90 per unit. The total variable costs given this estimate are:

A proposed project has ﬁxed costs of $2,401.50, depreciation expense of $800, and a sales quantity of 950 units. What is the contribution margin if the projected level of sales is the Accounting break-even point?

Using this value, the earnings before interest and taxes will be:

A ﬁrm has ﬁxed costs of $30,000 per year, depreciation of $10,000 per year, a price per unit of $50, and an accounting break-even point of 2,000 units. What is the ﬁrm's marginal cost at the Accounting break-even point?

TD, Inc. is analyzing a new project. The data they have gathered to date is as follows: What are the annual sales under the best-case scenario?

At a production level of 11,200 units a project has total costs of $138,000. The variable cost per unit is $9.84. What is the amount of the total ﬁxed costs if the production level is increased to 14,000 Units? The ﬁrm currently has suﬃcient ﬁxed assets to reach this level of production.

What is the operating cash ﬂow for a sensitivity analysis using total ﬁxed costs of $26,000?

At a production level of 5,600 units a project has total costs of $89,000. The variable cost per unit is $11.20. What is the amount of the total ﬁxed costs if the production level is increased to 6,100 Units without increasing the total ﬁxed assets?