Question 1

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 revenue that occurs when one more unit of output is sold.

Question 2

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 3

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

Simulation analysis combines scenario analysis and sensitivity analysis by simulating different scenarios and testing their sensitivity to various variables. This allows for a more comprehensive understanding of potential outcomes and risks.

Question 4

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 are costs that do not vary with the level of production/output in the short run. They remain constant regardless of the volume of goods or services produced. Therefore, option B is the correct answer.

Question 5

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, in which he looks at multiple possible outcomes for a project based on different scenarios or situations. He is projecting the most optimistic, most realistic, and most pessimistic outcomes, which are different scenarios that could play out for the project.

Question 6

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 or production levels. As sales increase, variable costs increase, and as sales decrease, variable costs decrease. This is in contrast to fixed costs which remain constant regardless of sales or production levels. Therefore, choice C is the best answer.

Question 7

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 risk that the projected cash flows may not materialize as expected due to unforeseen events or errors in estimation. Therefore, the correctness of the decision to accept or reject a project depends highly on the accuracy of the projected cash flows, as it affects the expected return on investment and the feasibility of the project.

Question 8

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 posing "what-if" questions and determining the changes in the estimated Net Present Value (NPV) of a project. This allows decision-makers to consider various scenarios and determine the potential impact on the project's financial performance. The other options do not accurately describe scenario analysis.

Question 9

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 given situation is referred to as capital rationing where a firm has positive NPV projects but cannot initiate them due to a lack of financing. Capital rationing can be caused by internal factors such as limited availability of funds, or external factors such as a credit crunch or macroeconomic conditions. In this case, Bell Weather Goods is constrained by a lack of funds and is unable to finance its projects despite their positive NPVs.

Question 10

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 is the risk associated with the uncertainty of future cash flows. This can lead to errors in decision making if the projected cash flows are incorrect. Options A, B, D, and E are not specific to forecasting risk.

Question 11

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 is the degree to which fixed costs are used in a company's cost structure. It measures the amount of fixed costs that a business has and how sensitive its operating income is to changes in sales. A higher degree of operating leverage means a higher proportion of fixed costs, which can magnify a company's profits or losses in response to changes in sales.

Question 12

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 involves developing several possible scenarios of how the project may perform and analyzing the potential outcomes. This method is useful for identifying the range of possible outcomes and the associated probabilities. It does not directly address fixed costs or break-even points, but rather helps to evaluate the risks and uncertainties associated with the project's future performance. Therefore, option C is the best choice.

Question 13

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 examines how sensitive a project's NPV is to changes in one specific variable. This helps assess the risk associated with a project by identifying which variables have the greatest impact on the outcome. Forecasting is a broader term that refers to predicting future events or trends. Scenario analysis involves examining multiple possible outcomes based on different sets of assumptions. Simulation is a technique used to model and analyze complex systems. Break-even analysis is used to determine the point at which a project or investment will start to generate a profit.

Question 14

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

In a best-case analysis, the goal is to determine the most favorable outcome. Therefore, the lowest variable cost per unit that can reasonably be expected would be used, as it would maximize profit margins.

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 firm is facing hard rationing, which occurs when no amount of financial planning or budgeting can secure the necessary funds for a project. This indicates a severe limitation in the availability of capital and a potential constraint on future growth and profitability.

Question 16

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 a company, often based on budgetary constraints rather than the merits of specific projects.

Question 17

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 18

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 when production is increased by one unit is referred to as marginal cost.

Question 19

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

At the cash break-even point, the operating cash flow is zero because it is the point where total revenues equal total cash expenses, resulting in no net cash flow.

Question 20

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 is the sales level that corresponds to a zero NPV, considering both operating and financing costs. Financial break-even takes into account the cost of capital, which is not considered in accounting, cash, or marginal break-even calculations. Leveraged break-even is similar to financial break-even, but it only considers financing costs.

Quiz 11: Project Analysis and Evaluation

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

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

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

Fixed costs:

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?

Variable costs can be defined as the costs that:

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

Scenario analysis is defined as the:

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:

Forecasting risk is defined as the possibility that:

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

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

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

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

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

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

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

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

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

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