Question 1

Which one of the following will be used in the computation of the best-case analysis of a proposed project?
A)minimal number of units that are expected to be produced and sold
B)the lowest expected salvage value that can be obtained for a project's fixed assets
C)the most anticipated sales price per unit
D)the lowest variable cost per unit that can reasonably be expected
E)the highest level of fixed costs that is actually anticipated

Accepted Answer

D

Question 2

By definition,which one of the following must equal zero at the cash break-even point?
A)net present value
B)internal rate of return
C)contribution margin
D)net income
E)operating cash flow

Accepted Answer

E

Question 3

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?
A)determining how fixed costs affect NPV
B)estimating the residual value of fixed assets
C)identifying the potential range of reasonable outcomes
D)determining the minimal level of sales required to break-even on an accounting basis
E)determining the minimal level of sales required to break-even on a financial basis

Accepted Answer

Scenario analysis helps identify the potential range of reasonable outcomes by examining different plausible scenarios and their corresponding impact on the project. It does not directly relate to fixed costs, residual values, or determining break-even points.

Question 4

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:
A)method of analysis used to make the decision.
B)initial cash outflow.
C)ability to recoup any investment in net working capital.
D)accuracy of the projected cash flows.
E)length of the project.

Accepted Answer

Forecasting risk refers to the uncertainty of future cash flows, and the correctness of a decision to accept or reject a project depends highly on the accuracy of the projected cash flows. Even if the other factors are favorable, an incorrect cash flow projection can lead to a poor investment decision.

Question 5

The change in variable costs that occurs when production is increased by one unit is referred to as the:
A)marginal cost.
B)average cost.
C)total cost.
D)scenario cost.
E)net cost.

Accepted Answer

The change in variable costs that occurs when production is increased by one unit is known as the marginal cost. It helps businesses make informed production decisions by showing them how much extra it costs to produce each additional unit.

Question 6

Which one of the following is defined as the sales level that corresponds to a zero NPV?
A)accounting break-even
B)leveraged break-even
C)marginal break-even
D)cash break-even
E)financial break-even

Accepted Answer

Financial break-even refers to the sales level at which the project's NPV is zero, and it takes into account the time value of money and the cost of capital. thereby making it the most appropriate choice. The other options are not specifically tied to NPV and do not consider the cost of capital.

Question 7

Operating leverage is the degree of dependence a firm places on its:
A)variable costs.
B)fixed costs.
C)sales.
D)operating cash flows.
E)net working capital.

Accepted Answer

Operating leverage refers to the proportion of fixed costs a firm has in relation to its variable costs. The higher the proportion of fixed costs, the higher the firm's operating leverage.

Question 8

Fixed costs:
A)change as a small quantity of output produced changes.
B)are constant over the short-run regardless of the quantity of output produced.
C)are defined as the change in total costs when one more unit of output is produced.
D)are subtracted from sales to compute the contribution margin.
E)can be ignored in scenario analysis since they are constant over the life of a project.

Accepted Answer

Fixed costs remain the same in the short-run regardless of the quantity of output produced. They do not change as small quantity of output produced changes, are not defined as the change in total costs when one more unit of output is produced and are not subtracted from sales to compute the contribution margin. While they may remain constant over the life of a project, they cannot be ignored in scenario analysis as they still impact a company's financial performance.

Question 9

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:
A)marginal spending.
B)capital preservation.
C)soft rationing.
D)hard rationing.
E)marginal rationing.

Accepted Answer

Soft rationing involves allocating a fixed amount of funds for capital spending to each business unit within an organization, rather than based on the specific needs or profitability of each project.

Question 10

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.
A)forecasting
B)combined
C)complex
D)simulation
E)break-even

Accepted Answer

A combination of scenario analysis and sensitivity analysis is often referred to as simulation analysis. It involves creating models based on different scenarios and testing their sensitivity to changes in various variables. This approach allows for a more comprehensive analysis of the possible outcomes and risks associated with a decision.

Question 11

Bell Weather Goods has several proposed independent projects that have positive NPVs.However,the firm cannot initiate any of the projects due to a lack of financing.This situation is referred to as:
A)financial rejection.
B)project rejection.
C)soft rationing.
D)marginal rationing.
E)capital rationing.

Accepted Answer

The situation described is one of capital rationing, which occurs when a firm has more positive NPV projects than available funds. The firm is unable to initiate all projects due to a lack of financing, resulting in the need to prioritize which projects to undertake.

Question 12

The change in revenue that occurs when one more unit of output is sold is referred to as:
A)marginal revenue.
B)average revenue.
C)total revenue.
D)erosion.
E)scenario revenue.

Accepted Answer

Marginal revenue is the change in total revenue that results from producing and selling one additional unit of output.

Question 13

Variable costs can be defined as the costs that:
A)remain constant for all time periods.
B)remain constant over the short run.
C)vary directly with sales.
D)are classified as non-cash expenses.
E)are inversely related to the number of units sold.

Accepted Answer

Variable costs are costs that vary directly with sales, meaning as the level of sales increases, the variable costs also increase. This could be due to costs such as materials or labor needed to produce more units. Therefore, option C is the correct answer.

Question 14

By definition,which one of the following must equal zero at the accounting break-even point?
A)net present value
B)internal rate of return
C)contribution margin
D)net income
E)operating cash flow

Accepted Answer

At the accounting break-even point, a company generates just enough revenue to cover its total operating costs, resulting in a net income of zero. This is because all costs, including fixed and variable, are exactly matched by the revenue, leaving no profit or loss.

Question 15

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances.This firm is facing:
A)financial deferral.
B)financial allocation.
C)capital allocation.
D)marginal rationing.
E)hard rationing.

Accepted Answer

The situation described is known as hard rationing, which occurs when a firm is unable to obtain financing for a project under any circumstances. This is different from soft rationing, where a firm may be able to obtain financing but chooses not to due to internal constraints or risk considerations. Hard rationing can occur due to a variety of factors such as tight credit markets or high levels of debt.

Question 16

Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic,the most realistic,and the most pessimistic outcome that can reasonably be expected.Which type of analysis is Steve using?
A)simulation testing
B)sensitivity analysis
C)break-even analysis
D)rationing analysis
E)scenario analysis

Accepted Answer

Steve is using scenario analysis, where he projects the best-case (most optimistic), worst-case (most pessimistic), and most likely (most realistic) outcomes of a new project. This type of analysis is commonly used in risk management to assess potential outcomes and develop contingency plans.

Question 17

Forecasting risk is defined as the possibility that:
A)some proposed projects will be rejected.
B)some proposed projects will be temporarily delayed.
C)incorrect decisions will be made due to erroneous cash flow projections.
D)some projects will be mutually exclusive.
E)tax rates could change over the life of a project.

Accepted Answer

Forecasting risk refers to the possibility of incorrect decisions being made due to inaccurate cash flow projections. The other choices are related to different types of risks.

Question 18

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.
A)forecasting
B)scenario
C)sensitivity
D)simulation
E)break-even

Accepted Answer

Sensitivity analysis specifically focuses on changing a single variable to see how it affects the overall NPV of a project. Forecasting, scenario, and simulation analysis all involve multiple variables and their interactions. Break-even analysis is focused on determining the point at which a project will become profitable, rather than analyzing changes in NPV.

Question 19

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?
A)degree of sensitivity
B)degree of operating leverage
C)accounting break-even
D)cash break-even
E)contribution margin

Accepted Answer

The degree of operating leverage measures the relationship between the percentage change in operating cash flow and the percentage change in quantity sold, indicating how earnings before interest and taxes (EBIT) are affected by changes in sales volume.

Question 20

Scenario analysis is defined as the:
A)determination of the initial cash outlay required to implement a project.
B)determination of changes in NPV estimates when what-if questions are posed.
C)isolation of the effect that a single variable has on the NPV of a project.
D)separation of a project's sunk costs from its opportunity costs.
E)analysis of the effects that a project's terminal cash flows has on the project's NPV.

Accepted Answer

Scenario analysis involves analyzing how changes in certain variables will affect the NPV estimate of a project. By posing "what-if" questions and analyzing the resulting changes in NPV, managers can better understand the potential risks and outcomes associated with a project. The other answer choices do not accurately describe scenario analysis.

Quiz 11: Project Analysis and Evaluation

Which one of the following will be used in the computation of the best-case analysis of a proposed project?

By definition,which one of the following must equal zero at the cash break-even point?

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

The change in variable costs that occurs when production is increased by one unit is referred to as the:

Which one of the following is defined as the sales level that corresponds to a zero NPV?

Operating leverage is the degree of dependence a firm places on its:

Fixed costs:

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.

Bell Weather Goods has several proposed independent projects that have positive NPVs.However,the firm cannot initiate any of the projects due to a lack of financing.This situation is referred to as:

The change in revenue that occurs when one more unit of output is sold is referred to as:

Variable costs can be defined as the costs that:

By definition,which one of the following must equal zero at the accounting break-even point?

PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances.This firm is facing:

Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic,the most realistic,and the most pessimistic outcome that can reasonably be expected.Which type of analysis is Steve using?

Forecasting risk is defined as the possibility that:

An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

Scenario analysis is defined as the: