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Exam 11: Project Analysis and Evaluation

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Question 1

Multiple Choice

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Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?

A) hiring temporary workers from an employment agency rather than hiring part-time production employees
B) subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
C) leasing equipment on a long-term basis rather than buying equipment
D) lowering the projected selling price per unit
E) changing the proposed labor-intensive production method to a more capital intensive method

F) B) and D)
G) All of the above

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B

Question 2

Multiple Choice

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An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used. I. annual salary for the firm's president II. contribution margin per unit III. cost of equipment required by a project IV. variable cost per unit

A) I and III only
B) I and IV only
C) II and III only
D) I, III, and IV only
E) I, II, and IV only

F) A) and B)
G) A) and D)

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Question 3

Multiple Choice

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Sensitivity analysis is based on:

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $500 per set and have a variable cost of $200 per set. The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years. The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs. The high-priced clubs sell at $700 and have variable costs of $300. The company will also increase sales of its cheap clubs by 9,000 sets. The cheap clubs sell for $200 and have variable costs of $100 per set. The fixed costs each year will be $7,559,000. The company has also spent $1,133,000 on research and development for the new clubs. The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project. The tax rate is 40 percent, and the cost of capital is 8 percent. What is the IRR?

Assume you graph a project's net present value given various sales quantities. Which one of the following is correct regarding the resulting function?

Steele Insulators is analyzing a new type of insulation for interior walls. Management has compiled the following information to determine whether or not this new insulation should be manufactured. The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project. Projected fixed costs are $742,000 and the anticipated annual operating cash flow is $241,000. What is the degree of operating leverage for this project?

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:

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 fixed costs of $9,800, depreciation expense of $2,700, and a sales quantity of 2,100 units. The total variable costs are $5,607. What is the contribution margin per unit if the projected level of sales is the accounting break-even point?

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

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

Which of the following statements are identified with financial break-even point? I. The present value of the cash inflows exactly offsets the initial cash outflow. II. The payback period is equal to the life of the project. III. The NPV is zero. IV. The discounted payback period equals the life of the project.

You are the manager of a project that has a 2.8 degree of operating leverage and a required return of 14 percent. Due to the current state of the economy, you expect sales to decrease by 7 percent next year. What change should you expect in the operating cash flows next year given your sales prediction?

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

Spencer Tools would like to offer a special product to its best customers. However, the firm wants to limit its maximum potential loss on this product to the firm's initial investment in the project. The fixed costs are estimated at $21,000, the depreciation expense is $11,000, and the contribution margin per unit is $12.50. What is the minimum number of units the firm should pre-sell to ensure its potential loss does not exceed the desired level?

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 11 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 $\pm$ 9 percent. What is the worst case NPV?

Mountain Gear can manufacture mountain climbing shoes for $14.95 per pair in variable raw material costs and $18.46 per paid in variable labor costs. The shoes sell for $127 per pair. Last year, production was 170,000 pairs and fixed costs were $830,000. What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 10,000 pairs?

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

When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

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, Uptown Promotions is limited to spending $10 million for new projects next year. This is an example of: