Question 1

The accounting operating profit break-even points are smaller than the corresponding pretax operating cash flow break-even points for a project with positive costs.

Accepted Answer

The accounting operating profit break-even point typically includes both fixed and variable costs, while the pretax operating cash flow break-even point primarily focuses on covering variable costs and the cash fixed costs, excluding non-cash expenses like depreciation. Therefore, the cash flow break-even point can be reached before the accounting profit break-even point, especially in projects with significant non-cash expenses.

Question 2

EBITDA stands for:

Accepted Answer

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is a financial metric used to evaluate a company's operating performance by looking at its earnings before accounting for non-operating expenses such as interest and taxes, and accounting for non-cash expenses such as depreciation and amortization.

Question 3

Sensitivity analysis involves examining the sensitivity of the output from an analysis, such as the NPV, to changes in individual assumptions.

Accepted Answer

Sensitivity analysis is a technique that helps identify how changes in one input variable affect the output of a model, analysis, or decision-making process. It involves examining the sensitivity of the output to changes in individual assumptions or inputs to determine which assumptions or inputs have the greatest impact on the overall outcome. Therefore, the statement is true.

Question 4

Compared to an identical project with a lower proportion of fixed costs, a project with a higher proportion of fixed costs will have:

Accepted Answer

A higher proportion of fixed costs means that a larger portion of the total costs are independent of changes in revenue. Therefore, a small decrease in revenue can lead to a significant decrease in EBITDA, resulting in a higher degree of sensitivity of EBITDA to a change in revenues.

Question 5

The economic break-even point focuses on the after-tax free cash flows associated with the project for its entire life.

Accepted Answer

The economic break-even point does focus on the after-tax free cash flows associated with the project for its entire life.

Question 6

The NPV of a project will equal $0 when the present value of the annual FCFs from the project, PV (FCF), equals the present value of net nonrecurring investments.

Accepted Answer

This is because the NPV formula calculates the difference between the present value of all future cash inflows (FCFs) and the present value of all future cash outflows, including net nonrecurring investments. When the NPV equals zero, it means that the present value of all expected cash inflows is equal to the present value of all expected cash outflows, including both recurring and nonrecurring investments.

Question 7

The economic break-even point focuses on the cash flows or profits from operations rather than after-tax free cash flows associated with the project.

Accepted Answer

The economic break-even point typically considers after-tax free cash flows rather than just the cash flows or profits from operations, as it aims to determine the point at which a project becomes financially viable after all expenses and taxes.

Question 8

The degree of pretax cash flow operating leverage provides us with:

Accepted Answer

The degree of pretax cash flow operating leverage measures the sensitivity of pretax operating cash flows to changes in revenue. It indicates how much pretax cash flows will change with a given change in revenue.

Question 9

Within a simulation analysis, the firm will need to come up with some distributional assumptions concerning the forecast inputs, such as the mean and variance of the sales forecast.

Accepted Answer

Within a simulation analysis, the firm must make distributional assumptions for the forecast inputs, including mean and variance for sales forecasts.

Question 10

Revenue minus variable and fixed costs is best described by:

Accepted Answer

The answer of Revenue minus variable and fixed costs is...

Question 11

The crossover level of unit sales can be calculated for any two alternatives that have the same level of operating leverage.

Accepted Answer

The crossover level of unit sales is calculated to compare two alternatives, focusing on their fixed and variable costs, not specifically on their operating leverage. Operating leverage can influence the analysis, but the key is comparing fixed and variable costs to find where the total costs of both alternatives are equal.

Question 12

The accounting operating profit (EBIT) break-even point tells us how many units must be sold to avoid an accounting operating loss.

Accepted Answer

The accounting operating profit (EBIT) break-even point represents the level of sales at which the company's accounting operating income equals its accounting operating expenses, meaning that it is neither making a profit nor a loss. Therefore, it tells us how many units must be sold to avoid an accounting operating loss.

Question 13

An economic break-even point is the number of units that must be sold each year during the life of the project so that the difference of present value of cash inflows and present value of cash outflows is one.

Accepted Answer

An economic break-even point is the number of units that must be sold each year during the life of the project so that the present value of cash inflows is equal to the present value of cash outflows. The difference between the two would be zero, not one.

Question 14

The crossover level of unit sales is the level at which one fixed/variable cost combination of production will begin to generate higher levels of operating cash flows than another fixed/variable cost combination of production.

Accepted Answer

The definition provided accurately describes the concept of crossover level. It represents the point at which one production cost structure becomes more profitable than another in terms of generating operating cash flows.

Question 15

Simulation analysis has the benefit of providing a pinpoint accurate forecast of a project's NPV.

Accepted Answer

Although simulation analysis can provide a range of potential outcomes and their respective probabilities, it is still subject to uncertainties and assumptions, and therefore cannot offer pinpoint accuracy in forecasting a project's NPV.

Question 16

If a firm knows that a price change will have an effect on a number of other forecast variables, such as the sales forecast, then the firm might require scenario analysis rather than sensitivity analysis.

Accepted Answer

Scenario analysis takes into account the potential impact of multiple variables on a decision, while sensitivity analysis only considers the effect of changes in one variable. Therefore, if a firm knows that a price change will also impact other forecasts, scenario analysis would be more appropriate to assess the overall impact.

Question 17

The economic break-even point considers a single year rather than the entire life.

Accepted Answer

The economic break-even point considers the entire life of a project or investment, not just a single year, as it aims to determine the point at which total costs and total revenues are equal over the project's lifespan.

Question 18

An analysis in which a firm would like to know the effect of a price change on the NPV of a project, holding all other variables and forecasts constant, is one type of sensitivity analysis.

Accepted Answer

Sensitivity analysis involves testing the impact of changes in one variable on the outcome of a project while keeping all other variables constant. In this case, the firm is interested in knowing how a change in price affects the NPV, while assuming that all other variables and forecasts remain the same.

Question 19

Another name for EBITDA is:

Accepted Answer

EBITDA stands for "Earnings Before Interest, Taxes, Depreciation, and Amortization." Another name for this is pretax operating cash flow, which represents the cash generated by operations before accounting for interest, taxes, depreciation, and amortization. Options B, C, and D are not accurate descriptions of EBITDA.

Question 20

If a firm is planning to operate in an environment in which there will be a great deal of variability in the level of revenues, then the firm:

Accepted Answer

When a firm is operating in an environment with high revenue variability, it is best to have low fixed costs and higher per unit variable costs. This allows the firm to adjust its production levels and costs in response to changes in revenue without incurring high levels of fixed costs that cannot be adjusted. This flexibility is important in turbulent environments and can improve the sustainability and profitability of the firm. Therefore, option C is the best choice.

Quiz 12: Evaluating Project Economics