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Exam 11: Project Analysis and Evaluation

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Question 41

Multiple Choice

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You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value. To determine that sales level you should compute the:

A) contribution margin per unit and set that margin equal to the fixed costs per unit.
B) degree of operating leverage at the current sales level.
C) accounting break-even point.
D) cash break-even point.
E) financial break-even point.

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Question 42

Multiple Choice

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Which one of the following characteristics relates to the cash break-even point for a given project?

A) The project never pays back.
B) The discounted payback period equals the project's life.
C) The NPV is equal to zero.
D) The IRR equals the required rate of return.
E) The OCF is equal to the depreciation expense.

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Question 43

Multiple Choice

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Which one of the following characteristics best describes a project that has a low degree of operating leverage?

Windows and More is reviewing a project with sales of 6,200 units, ±2 percent, at a sales price of $29, ±1 percent, per unit. The expected variable cost per unit is $11, ±3 percent, and the expected fixed costs are $87,000, ±1 percent. The depreciation expense is $68,000 and the tax rate is 21 percent. What is the net income under the worst-case scenario?

A project has a contribution margin per unit of $12.07, fixed costs of $67,840, depreciation of $14,310, variable costs per unit of $14.09, and a financial break-even point of 15,624 units. What is the operating cash flow at this level of output?

Forecasting risk is defined as the possibility that:

Mountain Gear can manufacture mountain climbing shoes for $37.11 per pair in variable raw material costs and $15.09 per pair in variable labor costs. The shoes sell for $99 per pair. Last year, production was 248,000 pairs and fixed costs were $1.67 million. The maximum production level for the firm given its current assets is 275,000 pairs. What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 12,000 pairs?

Which one of the following types of analysis is the most complex to conduct?

Steele Insulators is analyzing a new type of insulation for interior walls. The initial fixed asset requirement is $1.62 million, which would be depreciated straight-line to zero over the 7-year life of the project. Projected fixed costs are $287,400 and the anticipated operating cash flow is $136,300. What is the degree of operating leverage for this project?

You are considering a new product launch. The project will have an initial cost for fixed assets of $1,150,000, a three-year life, and no salvage value; depreciation is straight-line to zero. Sales are projected at 230 units per year, price per unit will be $7,500, variable cost per unit will be $3,900, and fixed costs will be $122,000 per year. The required return is 14.5 percent and the relevant tax rate is 24 percent. Based on your experience, you think the unit sales and price are accurate within a ±2 percent range while costs may vary by ±3 percent. What is the worst-case NPV?

Which of the following are inversely related to variable costs per unit?

The key means of defending against forecasting risk is to:

Simulation analysis is based on assigning a ________ and analyzing the results.

Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?

The Coffee Express has computed its fixed costs to be $.27 for every cup of coffee it sells given annual sales of 739,000 cups. The sales price is $.99 per cup while the variable cost per cup is $.12. How many cups of coffee must it sell to break even on a cash basis?

A project has a unit price of $29.99, a variable cost per unit of $9.06, fixed costs of $487,020, and depreciation expense of $38,009. Ignore taxes. What is the accounting break-even quantity?

Assume both the discount and tax rates are positive values. At the financial break-even point, the:

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?

Which one of these combinations must increase the contribution margin?