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Exam 11: Project Analysis and Evaluation

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Question 21

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Consider a project with the following data: accounting break-even quantity = 29,000 units; cash break-even quantity = 16,250 units; life = 10 years; fixed costs = $203,000; variable costs = $24 per unit; required return = 14 percent; depreciation = straight line.Ignoring the effect of taxes,what is the financial break-even quantity?

A) 38,723 units
B) 39,201 units
C) 39,458 units
D) 39,624 units
E) 40,693 units

F) A) and E)
G) A) and C)

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Question 22

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You are considering a new product launch.The project will cost $630,000,have a 5-year life,and have no salvage value; depreciation is straight-line to zero.Sales are projected at 160 units per year,price per unit will be $24,000,variable cost per unit will be $12,000,and fixed costs will be $283,000 per year.The required return is 12 percent and the relevant tax rate is 34 percent.Based on your experience,you think the unit sales,variable cost,and fixed cost projections given here are probably accurate to within ±9 percent.What is the worst case NPV?

A) $3,417,907
B) $2,573,269
C) $888,618
D) $3,102,134
E) $3,458,020

F) B) and C)
G) A) and E)

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Question 23

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As the degree of sensitivity of a project to a single variable rises,the:

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

Stellar Plastics is analyzing a proposed project.The company expects to sell 12,000 units,plus or minus 5 percent.The expected variable cost per unit is $3.20 and the expected fixed costs are $30,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $24,000.The tax rate is 34 percent.The sales price is estimated at $7.50 a unit,plus or minus 4 percent.What is the operating cash flow for a sensitivity analysis using total fixed costs of $31,000?

A project has a projected IRR of negative 100 percent.Which one of the following statements must also be true concerning this project?

We are evaluating a project that costs $854,000,has a 15-year life,and has no salvage value.Assume that depreciation is straight-line to zero over the life of the project.Sales are projected at 154,000 units per year.Price per unit is $41,variable cost per unit is $20,and fixed costs are $865,102 per year.The tax rate is 33 percent,and we require a 14 percent return on this project.Suppose the projections given for price,quantity,variable costs,and fixed costs are all accurate to within ±14 percent.What is the worst-case NPV?

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

The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms: 1) The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. 2) The units purchased must be paid for in cash at the time of sale. 3) The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4) The net profit of the firm should not be affected. 5) The prices will be in effect for one week only. Given these conditions,the special sale price should be set equal to the:

Sunset United is analyzing a proposed project.The company expects to sell 15,000 units,plus or minus 4 percent.The expected variable cost per unit is $120 and the expected fixed costs are $311,000.The fixed and variable cost estimates are considered accurate within a plus or minus 3 percent range.The depreciation expense is $74,000.The tax rate is 35 percent.The sales price is estimated at $170 a unit,plus or minus 2 percent.What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $125?

The base case values used in scenario analysis are the ones considered the most:

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 proposed project has a contribution margin per unit of $13.10,fixed costs of $74,000,depreciation of $12,500,variable costs per unit of $22,and a financial break-even point of 11,360 units.What is the operating cash flow at this level of output?

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

Cantor's has been busy analyzing a new product.Thus far,management has determined that an OCF of $218,200 will result in a zero net present value for the project,which is the minimum requirement for project acceptance.The fixed costs are $329,000 and the contribution margin per unit is $211.The company feels that it can realistically capture 2.5 percent of the 110,000 unit market for this product.The tax rate is 34 percent and the required rate of return is 11 percent.Should the company develop the new product? Why or why not?

Uptown Promotions has three divisions.As part of the planning process,the CFO requested that each division submit its capital budgeting proposals for next year.These proposals represent positive net present value projects that fall within the long-range plans of the firm.The requests from the divisions are $4.2 million,$3.1 million,and $6.8 million,respectively.For the firm as a whole,the management of Uptown Promotions has limited spending to $10 million for new projects next year.This is an example of:

At an output level of 50,000 units,you calculate that the degree of operating leverage is 1.8.What will be the percentage change in operating cash flow if the new output level is 54,500 units?

Which of the following variables will be at their highest expected level under a worst case scenario? I.fixed cost II.sales price III.variable cost IV.sales quantity

Sensitivity analysis determines the:

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