Question 1

A project has a contribution margin of $5, projected fixed costs of $10,000, a projected variable cost per unit of $12, and a projected present value break-even point of 6,000 units.What is the operating cash flow at this level of output?

Accepted Answer

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Question 2

Ryan Industries is considering a project with a discounted payback just equal to the project's life.The projections include a sales price of $12, variable cost per unit of $9, and fixed costs of $5,000.The operating cash flow is $8,000.What is the break-even quantity?

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Question 3

Can different discount rates be used for different stages in a decision tree? If so, what would be the benefit of such action?

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Question 4

Sensitivity analysis is a method which allows for evaluation of the NPV given a series of changes to the underlying assumptions.Discuss why and how scenario analysis is used in addition to sensitivity analysis.

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Question 5

Quirk and Company has been busy analyzing a new product.It has determined that an operating cash flow of $18,500 will result in a zero net present value, which is a company requirement for project acceptance.The fixed costs are $14,000 and the contribution margin is $8.00.The company feels that it can realistically capture 10% of the 40,000 unit market for this product.Should the company develop the new product? Why or why not?

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Question 6

The market value of an investment project should be viewed as the sum of the standard NPV and the value of managerial options.Explain three different real or managerial options that management may have, what they are, and how they would influence market value.

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Question 7

What is the benefit of scenario analysis if it does not produce an accept or reject decision for a proposed project?

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Question 8

Consider the following statement by a project analyst: "I analyzed my project using scenarios for the base case, best case, and worst case.I computed break-evens and degrees of operating leverage.I did sensitivity analysis and simulation analysis.I computed NPV, IRR, payback, AAR, and PI.In the end, I have over a hundred different estimates and am more confused than ever.I would have been better off just sticking with my first estimate and going by my gut reaction." Critique this statement.

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Question 9

Discuss two shortcomings in the standard decision tree analysis that a financial manager should be cognizant of?

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Question 10

The Marx Brewing Company recently installed a new bottling machine.The machine's initial cost is $2,000, and can be depreciated on a straight line basis to a zero salvage in 5 years.The machine's fixed cost per year is $1,800, and its variable cost is $0.50 per unit.The selling price per unit is $1.50.Marx's tax rate is 34%, and it uses a 16% discount rate.Calculate the accounting break-even point on the new machine, as well as the present value break-even point on the new machine.

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Quiz 7: Risk Analysis, Real Options, and Capital Budgeting