Question 1

What are some of the practical problems of capital budgeting in large corporations?

Accepted Answer

For most large corporations there are tw...

Question 2

One of the problems inherent in sensitivity analysis is that:

Accepted Answer

A)   NPVs do not change once a project is introduced.
B)   most projects are equally sensitive to all variables.
C)   it ignores any interrelationships between variables.
D)  the cost of conducting the analysis is excessive.E) A) and B)
F) A) and D)

Question 3

Soft capital rationing may be beneficial to a firm if it:

Accepted Answer

A)   reduces a firm's taxes.
B)   weeds out proposals with weaker or biased NPVs.
C)   allows managers to select their favorite projects.
D)  lowers the cost of capital.E) B) and D)
F) A) and B)

Question 4

The option to alter production technology:

Accepted Answer

A)   has no value once a project has been implemented.
B)   lowers a project's NPV due to the increased uncertainty.
C)   provides managers with valuable flexibility.
D)  should be ignored when analyzing a project because of its uncertainty.E) All of the above
F) A) and B)

Question 5

Sensitivity analysis takes into consideration the interrelationship of variables.

Accepted Answer

A) True 
 B)False

Question 6

What is the change in the NPV of a one-year project if fixed costs are increased from $400 to $600, the firm is profitable, has a 35% tax rate, and employs a 12% cost of capital?

Accepted Answer

A)   -$200.00
B)   -$178.57
C)   -$130.00
D)  -$116.07E) A) and B)
F) C) and D)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

A 6-year project has an economic break-even level of sales of $5 million and a discount rate of 8%. The annual cash inflows are equal to 10% of sales minus $300,000. What was the initial investment in the project assuming that none of the investment is recoverable when the project ends?

Accepted Answer

A)   $416,667
B)   $924,576
C)   $1,016,678
D)  $2,311,450E) None of the above
F) A) and C)

Question 9

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

Accepted Answer

A) True 
 B)False

Question 10

What level of management is responsible for originating capital budgeting proposals?

Accepted Answer

A)   Senior management
B)   Divisional management
C)   Lower management
D)  All levels of managementE) A) and B)
F) A) and C)

Question 11

When management selects new production technologies that require a higher proportion of fixed costs than that of its operations, then the implementation of those technologies will:

Accepted Answer

A)   decrease the DOL.
B)   increase the DOL.
C)   decrease the NPV-breakeven level of sales.
D)  reduce the NPV of the cash flows.E) B) and C)
F) B) and D)

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Calculate the ratio of variable costs to sales for a firm with a $3 million accounting break-even revenue point, $1.2 million fixed costs, and $450,000 depreciation.

Accepted Answer

A)   40%
B)   45%
C)   55%
D)  60%E) B) and C)
F) B) and D)

Question 15

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Accepted Answer

A)   It raises the break-even level.
B)   It reduces the break-even level.
C)   It has no effect on the break-even level.
D)  This cannot be determined without knowing the length of the investment horizon.E) B) and D)
F) A) and D)

Question 16

A capital budget shows a proposed list of investments.

Accepted Answer

A) True 
 B)False

Question 17

Which one of the following would not be included as a traditional capital budgeting project?

Accepted Answer

A)   Machine replacement proposals
B)   Salary adjustment proposals
C)   New product proposals
D)  Plant expansion proposalsE) None of the above
F) All of the above

Question 18

A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation and sales of $3 million. How does the current level of sales compare to the accounting break-even sales level?

Accepted Answer

A)   Current sales are $2 million below the break-even level.
B)   Current sales are $333,333 below the break-even level.
C)   Current sales are $800,000 below the break-even level.
D)  Current sales exceed the break-even level by $360,000.E) All of the above
F) C) and D)

Question 19

If the level of sales is less than that calculated as the economic break-even level, then the:

Accepted Answer

A)   project will break even in accounting terms.
B)   project's EVA will be greater than zero but less than the opportunity cost of capital.
C)   project will have a negative EVA.
D)  discount rate should be reduced.E) A) and B)
F) A) and C)

Question 20

If sensitivity analysis indicates none of the individual variables will cause a negative NPV under pessimistic conditions, then the:

Accepted Answer

A)   project is ensured to be successful.
B)   project's discount rate should be reduced.
C)   economic forecasts are possibly overly optimistic.
D)  interaction of the variables should be considered.E) B) and C)
F) A) and C)

Exam 10: Project Analysis

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Correct AnswerverifiedShow Answer

One of the problems inherent in sensitivity analysis is that:

Correct AnswerverifiedShow Answer

Calculate the ratio of variable costs to sales for a firm with a $3 million accounting break-even revenue point, $1.2 million fixed costs, and $450,000 depreciation.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The option to alter production technology:

Correct AnswerverifiedShow Answer

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

Correct AnswerverifiedShow Answer

A capital budget shows a proposed list of investments.

Correct AnswerverifiedShow Answer

When management selects new production technologies that require a higher proportion of fixed costs than that of its operations, then the implementation of those technologies will:

Correct AnswerverifiedShow Answer

If the level of sales is less than that calculated as the economic break-even level, then the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What are some of the practical problems of capital budgeting in large corporations?

Correct AnswerverifiedFor most large corporations there are tw...View AnswerShow Answer

What level of management is responsible for originating capital budgeting proposals?

Correct AnswerverifiedShow Answer

Sensitivity analysis takes into consideration the interrelationship of variables.

Correct AnswerverifiedShow Answer

A firm with 60% of sales going to variable costs, $1.5 million fixed costs, and $500,000 depreciation and sales of $3 million. How does the current level of sales compare to the accounting break-even sales level?

Correct AnswerverifiedShow Answer

Which one of the following would not be included as a traditional capital budgeting project?

Correct AnswerverifiedShow Answer

What is the change in the NPV of a one-year project if fixed costs are increased from $400 to $600, the firm is profitable, has a 35% tax rate, and employs a 12% cost of capital?

Correct AnswerverifiedShow Answer

If sensitivity analysis indicates none of the individual variables will cause a negative NPV under pessimistic conditions, then the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Soft capital rationing may be beneficial to a firm if it:

Correct AnswerverifiedShow Answer

A 6-year project has an economic break-even level of sales of $5 million and a discount rate of 8%. The annual cash inflows are equal to 10% of sales minus $300,000. What was the initial investment in the project assuming that none of the investment is recoverable when the project ends?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
For most large corporations there are tw...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified