Question 1

A capital budget shows a proposed list of investments.

Accepted Answer

A capital budget outlines the proposed investments and expenses of a company or organization for a certain period of time, usually a year.

Question 2

The greater the DOL, the greater the protection against operating losses during economic downturns.

Accepted Answer

DOL (Degree of Operating Leverage) measures how a company's operating income changes with a change in sales. A higher DOL indicates that a company has higher fixed costs relative to its variable costs, making it more sensitive to changes in sales. Therefore, during economic downturns, a company with a higher DOL is more exposed to operating losses, not more protected.

Question 3

Conflicts of interest between shareholders and managers may result in the sacrifice of attractive capital budgeting proposals.

Accepted Answer

Shareholders typically prioritize maximizing profits and increasing the value of their investments, while managers may prioritize their own interests, such as job security and personal advancement. This conflict of interest can lead to the rejection of potentially profitable capital budgeting proposals that may not align with the goals of both shareholders and managers.

Question 4

The clothing industry is considered to have a high degree of operating leverage.

Accepted Answer

The answer of The clothing industry is considered to have...

Question 5

What-if analysis is not crucial to capital budgeting.

Accepted Answer

What-if analysis is a crucial aspect of capital budgeting as it helps to evaluate different scenarios, estimate potential risks, and make informed decisions regarding investments in long-term projects. It involves analyzing variables and assumptions related to the project to determine their impact on the outcome. Without proper what-if analysis, the capital budgeting process may overlook important factors or make incorrect assumptions, leading to poor investment decisions.

Question 6

"What-if" questions ask what will happen to a project in various circumstances.

Accepted Answer

"What-if" questions are designed to explore different scenarios and variations in order to anticipate potential challenges or opportunities that may arise during a project. By asking "What if X happens?" or "What if we do Y instead of Z?" team members can prepare contingency plans, troubleshoot issues, and identify ways to optimize the project's outcomes.

Question 7

Scenario analysis allows managers to look at different and sometimes inconsistent combinations of variables.

Accepted Answer

The answer of Scenario analysis allows managers to look at...

Question 8

Sensitivity analysis takes into consideration the interrelationship of variables.

Accepted Answer

Sensitivity analysis typically examines how changes in a single input variable affect the output, assuming other variables remain constant, rather than considering the interrelationships between variables.

Question 9

The degree of operating leverage (DOL) shows the relationship between sales and pretax profits.

Accepted Answer

The degree of operating leverage (DOL) measures the percentage change in pretax profits relative to a given percentage change in sales. Therefore, it shows the relationship between sales and pretax profits.

Question 10

The NPV break-even level of sales will be higher than the accounting break-even level.

Accepted Answer

The NPV break-even level of sales takes into account the time value of money and the cost of capital, while the accounting break-even level only considers the fixed and variable costs. Therefore, the NPV break-even level of sales will require a higher level of sales to reach than the accounting break-even level.

Question 11

If a large proportion of a firm's costs is fixed, a shortfall in sales will have a magnified effect on the firm's profits.

Accepted Answer

If a large proportion of costs is fixed, then any decrease in sales will not result in a proportional decrease in costs, thus leading to a magnified effect on the firm's profits.

Question 12

What-if analysis can help identify the inputs that are most worth refining before you commit to a project.

Accepted Answer

What-if analysis is a useful tool to identify the most critical inputs that can impact a project's outcome. By analyzing possible scenarios, it becomes apparent which variables require further refinement before committing to the project. This proactive approach can help reduce risks and increase the chances of project success.

Question 13

Scenario analysis allows managers to look at different but consistent combinations of interrelated variables.

Accepted Answer

Scenario analysis involves examining various plausible combinations of variables to identify potential outcomes and prepare for them. In this process, the interrelation between these variables is also considered to ensure consistency in the analysis.

Question 14

The level of sales that produces a zero project NPV is referred to as the accounting break-even point.

Accepted Answer

The level of sales that produces a zero project NPV is referred to as the financial break-even point, not the accounting break-even point. The accounting break-even point is the level of sales that results in zero net income, where total revenue equals total costs (both fixed and variable).

Question 15

The strategic planning portion of the capital budgeting process is essentially a "bottom-up" process.

Accepted Answer

The strategic planning portion of capital budgeting process is a "top-down" process, where the organization's overall strategic goals and objectives are first established and then translated into specific projects or investments.

Question 16

While sensitivity analysis is forward-looking, scenario analysis attempts to reconstruct and analyze the past.

Accepted Answer

While sensitivity analysis is forward-looking and attempts to analyze the impact of changes in variables on the outcome, scenario analysis is a forward-looking technique that attempts to analyze the impact of different possible future events or scenarios. It does not attempt to reconstruct and analyze the past.

Question 17

The option to abandon a project becomes more valuable as the possible outcomes become more varied.

Accepted Answer

If there are only a few possible outcomes, the potential benefits of completing the project may outweigh the risks or challenges. However, if the outcomes are more varied, there is a higher likelihood that some of them will be unfavorable, making the option to abandon the project more valuable.

Question 18

Competitive advantage is an important element of many successful capital budgeting proposals.

Accepted Answer

Competitive advantage can provide a company with an edge over its competitors and result in increased profits and market share. Thus, it is an important factor that should be considered when making capital budgeting decisions.

Question 19

Operating leverage increases with fixed cost.

Accepted Answer

This is because fixed costs remain the same regardless of the level of production, causing a proportionately greater change in profits as production levels increase or decrease.

Question 20

The inputs that are most worth refining before you commit to a project are the ones that have the greatest potential to alter project NPV.

Accepted Answer

It is important to refine inputs that can have a significant impact on a project's net present value (NPV) before committing to the project. This allows for a more accurate forecast of the project's potential profitability and helps mitigate any potential risks.

Quiz 10: Project Analysis