Chapter 11 - Project Analysis and Evaluation

Chapter 11 - Project Analysis and Evaluation
Chapter 11
Project Analysis and Evaluation

Multiple Choice Questions

1. Forecasting risk is defined as the possibility that:
A. soe proposed projects !ill be rejected.
". soe proposed projects !ill be teporarily delayed.
C. incorrect decisions !ill be ade due to erroneous cash flo! projections.
#. soe projects !ill be utually e$clusive.
E. ta$ rates could change over the life of a project.

%. &cenario analysis is defined as the:
A. deterination of the initial cash outlay re'uired to ipleent a project.
". deterination of changes in (P) estiates !hen !hat-if 'uestions are posed.
C. isolation of the effect that a single variable has on the (P) of a project.
#. separation of a project*s sunk costs fro its opportunity costs.
E. analysis of the effects that a project*s terinal cash flo!s has on the project*s (P).

+. An analysis of the change in a project*s (P) !hen a single variable is changed is called
,,,,, analysis.
A. forecasting
". scenario
C. sensitivity
#. siulation
E. break-even

-. An analysis !hich cobines scenario analysis !ith sensitivity analysis is called ,,,,,
analysis.
A. forecasting
". cobined
C. cople$
#. siulation
E. break-even

11-1
.. )ariable costs can be defined as the costs that:
A. reain constant for all tie periods.
". reain constant over the short run.
C. vary directly !ith sales.
#. are classified as non-cash e$penses.
E. are inversely related to the nuber of units sold.

/. Fi$ed costs:
A. change as a sall 'uantity of output produced changes.
". are constant over the short-run regardless of the 'uantity of output produced.
C. are defined as the change in total costs !hen one ore unit of output is produced.
#. are subtracted fro sales to copute the contribution argin.
E. can be ignored in scenario analysis since they are constant over the life of a project.

0. 1he change in revenue that occurs !hen one ore unit of output is sold is referred to as:
A. arginal revenue.
". average revenue.
C. total revenue.
#. erosion.
E. scenario revenue.

2. 1he change in variable costs that occurs !hen production is increased by one unit is
referred to as the:
A. arginal cost.
". average cost.
C. total cost.
#. scenario cost.
E. net cost.

11-%
3. "y definition4 !hich one of the follo!ing ust e'ual 5ero at the accounting break-even
point6
A. net present value
". internal rate of return
C. contribution argin
#. net incoe
E. operating cash flo!

17. "y definition4 !hich one of the follo!ing ust e'ual 5ero at the cash break-even point6
#. net incoe

11. 8hich one of the follo!ing is defined as the sales level that corresponds to a 5ero (P)6
A. accounting break-even
". leveraged break-even
C. arginal break-even
#. cash break-even
E. financial break-even

1%. 9perating leverage is the degree of dependence a fir places on its:
A. variable costs.
". fi$ed costs.
C. sales.
#. operating cash flo!s.
E. net !orking capital.

11-+
1+. 8hich one of the follo!ing is the relationship bet!een the percentage change in operating
cash flo! and the percentage change in 'uantity sold6
A. degree of sensitivity
". degree of operating leverage
C. accounting break-even
#. cash break-even
E. contribution argin

1-. "ell 8eather :oods has several proposed independent projects that have positive (P)s.
;o!ever4 the fir cannot initiate any of the projects due to a lack of financing. 1his situation
is referred to as:
A. financial rejection.
". project rejection.
C. soft rationing.
#. arginal rationing.
E. capital rationing.

1.. 1he procedure of allocating a fi$ed aount of funds for capital spending to each business
unit is called:
A. arginal spending.
". capital preservation.
C. soft rationing.
#. hard rationing.
E. arginal rationing.

1/. PC Enterprises !ants to coence a ne! project but is unable to obtain the financing
under any circustances. 1his fir is facing:
A. financial deferral.
". financial allocation.
C. capital allocation.
E. hard rationing.

11--
10. Forecasting risk ephasi5es the point that the correctness of any decision to accept or
reject a project is highly dependent upon the:
A. ethod of analysis used to ake the decision.
". initial cash outflo!.
C. ability to recoup any investent in net !orking capital.
#. accuracy of the projected cash flo!s.
E. length of the project.

12. &teve is fairly cautious !hen analy5ing a ne! project and thus he projects the ost
optiistic4 the ost realistic4 and the ost pessiistic outcoe that can reasonably be
e$pected. 8hich type of analysis is &teve using6
A. siulation testing
". sensitivity analysis
C. break-even analysis
#. rationing analysis
E. scenario analysis

13. &cenario analysis is best suited to accoplishing !hich one of the follo!ing !hen
analy5ing a project6
A. deterining ho! fi$ed costs affect (P)
". estiating the residual value of fi$ed assets
C. identifying the potential range of reasonable outcoes
#. deterining the inial level of sales re'uired to break-even on an accounting basis
E. deterining the inial level of sales re'uired to break-even on a financial basis

%7. 8hich one of the follo!ing !ill be used in the coputation of the best-case analysis of a
proposed project6
A. inial nuber of units that are e$pected to be produced and sold
". the lo!est e$pected salvage value that can be obtained for a project*s fi$ed assets
C. the ost anticipated sales price per unit
#. the lo!est variable cost per unit that can reasonably be e$pected
E. the highest level of fi$ed costs that is actually anticipated

11-.
%1. 1he base case values used in scenario analysis are the ones considered the ost:
A. optiistic.
". desired by anageent.
C. pessiistic.
#. conducive to creating a positive net present value.
E. likely to occur.

%%. 8hich of the follo!ing variables !ill be at their highest e$pected level under a !orst case
scenario6
<. fi$ed cost
<<. sales price
<<<. variable cost
<). sales 'uantity
A. < only
". <<< only
C. << and <<< only
#. < and <<< only
E. <4 <<<4 and <) only

%+. 8hen you assign the lo!est anticipated sales price and the highest anticipated costs to a
project4 you are analy5ing the project under the condition kno!n as:
A. best case sensitivity analysis.
". !orst case sensitivity analysis.
C. best case scenario analysis.
#. !orst case scenario analysis.
E. base case scenario analysis.

11-/
%-. 8hich one of the follo!ing stateents concerning scenario analysis is correct6
A. 1he pessiistic case scenario deterines the a$iu loss4 in current dollars4 that a fir
could possibly incur fro a given project.
". &cenario analysis defines the entire range of results that could be reali5ed fro a proposed
investent project.
C. &cenario analysis deterines !hich variable has the greatest ipact on a project*s final
outcoe.
#. &cenario analysis helps anagers analy5e various outcoes that are possible given
reasonable ranges for each of the assuptions.
E. =anageent is guaranteed a positive outcoe for a project !hen the !orst case scenario
produces a positive (P).

%.. &ensitivity analysis deterines the:
A. range of possible outcoes given that ost variables are reliable only !ithin a stated
range.
". degree to !hich the net present value reacts to changes in a single variable.
C. net present value range that can be reali5ed fro a proposed project.
#. degree to !hich a project relies on its fi$ed costs.
E. ideal ratio of variable costs to fi$ed costs for profit a$ii5ation.

%/. Assue you graph a project*s net present value given various sales 'uantities. 8hich one
of the follo!ing is correct regarding the resulting function6
A. 1he steepness of the function relates to the project*s degree of operating leverage.
". 1he steeper the function4 the less sensitive the project is to changes in the sales 'uantity.
C. 1he resulting function !ill be a hyperbole.
#. 1he resulting function !ill include only positive values.
E. 1he slope of the function easures the sensitivity of the net present value to a change in
sales 'uantity.

%0. As the degree of sensitivity of a project to a single variable rises4 the:
A. less iportant the variable to the final outcoe of the project.
". less volatile the project*s net present value to that variable.
C. greater the iportance of accurately predicting the value of that variable.
#. greater the sensitivity of the project to the other variable inputs.
E. less volatile the project*s outcoe.

11-0
%2. &ensitivity analysis is based on:
A. varying a single variable and easuring the resulting change in the (P) of a project.
". applying differing discount rates to a project*s cash flo!s and easuring the effect on the
(P).
C. e$panding and contracting the nuber of years for a project to deterine the optial
project length.
#. the best4 !orst4 and ost e$pected situations.
E. various states of the econoy and the probability of each state occurring.

%3. 8hich type of analysis identifies the variable4 or variables4 that are ost critical to the
success of a particular project6
A. leverage
". risk
C. break-even
#. sensitivity
E. cash flo!

+7. &iulation analysis is based on assigning a ,,,,, and analy5ing the results.
A. narro! range of values to a single variable
". narro! range of values to ultiple variables siultaneously
C. !ide range of values to a single variable
#. !ide range of values to ultiple variables siultaneously
E. single value to each of the variables

+1. 8hich one of the follo!ing types of analysis is the ost cople$ to conduct6
A. scenario
". break-even
C. sensitivity
#. degree of operating leverage
E. siulation

11-2
+%. 1ed is analy5ing a project using siulation. ;is focus is liited to the short-ter. 1o ease
the siulation process4 he is cobining e$penses into various categories. 8hich one of the
follo!ing should he include in the fi$ed cost category6
A. production departent payroll ta$es
". e'uipent insurance
C. sales ta$
#. ra! aterials
E. product shipping costs

++. 8hich one of the follo!ing stateents concerning variable costs is correct6
A. )ariable costs inus fi$ed costs e'ual arginal costs.
". )ariable costs are e'ual to fi$ed costs !hen production is e'ual to 5ero.
C. An increase in variable costs increases the operating cash flo!.
#. )ariable costs are inversely related to fi$ed costs.
E. )ariable costs per unit are inversely related to the contribution argin per unit.

+-. 8hich of the follo!ing are inversely related to variable costs per unit6
<. contribution argin per unit
<<. nuber of units sold
<<<. operating cash flo! per unit
<). net profit per unit
A. < and << only
". <<< and <) only
C. <<4 <<<4 and <) only
#. <4 <<<4 and <) only
E. <4 <<4 <<<4 and <)

+.. &teve4 the sales anager for 1> Products4 !ants to sponsor a one-!eek ?Custoer
Appreciation &ale? !here the fir offers to sell additional units of a product at the lo!est
price possible !ithout negatively affecting the fir*s profits. 8hich one of the follo!ing
represents the price that should be charged for the additional units during this sale6
A. average variable cost
". average total cost
C. average total revenue
#. arginal revenue
E. arginal cost

11-3
+/. 1he president of :lobal 8holesalers !ould like to offer special sale prices to the fir*s
best custoers under the follo!ing ters:
1. 1he prices !ill apply only to units purchased in e$cess of the 'uantity norally purchased
by a custoer.
%. 1he units purchased ust be paid for in cash at the tie of sale.
+. 1he total 'uantity sold under these ters cannot e$ceed the e$cess capacity of the fir.
-. 1he net profit of the fir should not be affected.
.. 1he prices !ill be in effect for one !eek only.
:iven these conditions4 the special sale price should be set e'ual to the:
A. average variable cost of aterials only.
". average cost of all variable inputs.
C. sensitivity value of the variable costs.
#. arginal cost of aterials only.
E. arginal cost of all variable inputs.

+0. 1he contribution argin per unit is e'ual to the:
A. sales price per unit inus the total costs per unit.
". variable cost per unit inus the fi$ed cost per unit.
C. sales price per unit inus the variable cost per unit.
#. pre-ta$ profit per unit.
E. afterta$ profit per unit.

+2. 8hich of the follo!ing values !ill be e'ual to 5ero !hen a fir is producing the
accounting break-even level of output6
<. operating cash flo!
<<. internal rate of return
<<<. net incoe
<). payback period
A. < only
". <<< only
C. << and <<< only
#. < and <) only
E. <4 <<4 and <<< only

11-17
+3. An increase in !hich of the follo!ing !ill increase the accounting break-even 'uantity6
Assue straight-line depreciation is used.
<. annual salary for the fir*s president
<<. contribution argin per unit
<<<. cost of e'uipent re'uired by a project
<). variable cost per unit
A. < and <<< only
". < and <) only
C. << and <<< only
#. <4 <<<4 and <) only
E. <4 <<4 and <) only

-7. 8ebster <ron 8orks started a ne! project last year. As it turns out4 the project has been
operating at its accounting break-even level of output and is no! e$pected to continue at that
level over its lifetie. :iven this4 you kno! that the project:
A. !ill never pay back.
". has a 5ero net present value.
C. is operating at a higher level than if it !ere operating at its cash break-even level.
#. is operating at a higher level than if it !ere operating at its financial break-even level.
E. is lo!ering the total net incoe of the fir.

-1. :iven the follo!ing4 !hich feature identifies the ost desirable level of output for a
project6
A. operating cash flo! e'ual to the depreciation e$pense
". payback period e'ual to the project*s life
C. discounted payback period e'ual to the project*s life
#. 5ero <@@
E. 5ero operating cash flo!

-%. At the accounting break-even point4 the:
A. payback period ust e'ual the re'uired payback period.
". (P) is 5ero.
C. <@@ is 5ero.
#. contribution argin per unit e'uals the fi$ed costs per unit.
E. contribution argin per unit is 5ero.

11-11
-+. A project has a payback period that e$actly e'uals the project*s life. 1he project is
operating at:
A. its a$iu capacity.
". the financial break-even point.
C. the cash break-even point.
#. the accounting break-even point.
E. a 5ero level of output.

--. )alerie just copleted analy5ing a project. ;er analysis indicates that the project !ill have
a /-year life and re'uire an initial cash outlay of A+%74777. Annual sales are estiated at
A.234777 and the ta$ rate is +- percent. 1he net present value is a negative A+%74777. "ased
on this analysis4 the project is e$pected to operate at the:
A. a$iu possible level of production.
". iniu possible level of production.
C. financial break-even point.
#. accounting break-even point.
E. cash break-even point.

-.. A project has a projected <@@ of negative 177 percent. 8hich one of the follo!ing
stateents ust also be true concerning this project6
A. 1he discounted payback period e'uals the life of the project.
". 1he operating cash flo! is positive and e'ual to the depreciation.
C. 1he net present value of the project is negative and e'ual to the initial investent.
#. 1he payback period is e$actly e'ual to the life of the project.
E. 1he net present value of the project is e'ual to 5ero.

-/. 8hich of the follo!ing characteristics relate to the cash break-even point for a given
project6
<. 1he project never pays back.
<<. 1he <@@ e'uals the re'uired rate of return.
<<<. 1he (P) is negative and e'ual to the initial cash outlay.
<). 1he operating cash flo! is e'ual to the depreciation e$pense.
A. < and <<< only
". << and <) only
C. <4 <<4 and <<< only
#. <<4 <<<4 and <) only
E. <4 <<4 <<<4 and <)

11-1%
-0. 8hen the operating cash flo! of a project is e'ual to 5ero4 the project is operating at the:

-2. 8hich one of the follo!ing represents the level of output !here a project produces a rate
of return just e'ual to its re'uireent6
A. capital break-even
". cash break-even
#. financial break-even
E. internal break-even

-3. 8hich of the follo!ing stateents are identified !ith financial break-even point6
<. 1he present value of the cash inflo!s e$actly offsets the initial cash outflo!.
<<. 1he payback period is e'ual to the life of the project.
<<<. 1he (P) is 5ero.
<). 1he discounted payback period e'uals the life of the project.
A. < and << only
". < and <<< only
C. << and <) only
#. <4 <<4 and <<< only
E. <4 <<<4 and <) only

.7. Bou !ould like to kno! the iniu level of sales that is needed for a project to be
accepted based on its net present value. 1o deterine that sales level you should copute the:
A. contribution argin per unit and set that argin e'ual to the fi$ed costs per unit.
". contribution argin per unit.
C. accounting break-even point.
#. cash break-even point.
E. financial break-even point.

11-1+
.1. 1heresa is analy5ing a project that currently has a projected (P) of 5ero. 8hich of the
follo!ing changes that she is considering !ill help that project produce a positive (P)
instead6 Consider each change independently.
<. increase the 'uantity sold
<<. decrease the fi$ed leasing cost for e'uipent
<<<. decrease the labor hours needed to produce one unit
<). increase the sales price
A. < and << only
". < and <) only
C. <<4 <<<4 and <) only
#. <4 <<4 and <) only
E. <4 <<4 <<<4 and <)

.%. Bou are considering a project that you believe is 'uite risky. 1o reduce any potentially
harful results fro accepting this project4 you could:
A. lo!er the degree of operating leverage.
". lo!er the contribution argin per unit.
C. increase the initial cash outlay.
#. increase the fi$ed costs per unit !hile lo!ering the contribution argin per unit.
E. lo!er the operating cash flo! of the project.

.+. 8hich one of the follo!ing characteristics best describes a project that has a lo! degree
of operating leverage6
A. high variable costs relative to the fi$ed costs
". relatively high initial cash outlay
C. an 9CF that is highly sensitive to the sales 'uantity
#. high level of forecasting risk
E. a high depreciation e$pense

11-1-
.-. 8hich one of the follo!ing !ill best reduce the risk of a project by lo!ering the degree of
operating leverage6
A. hiring teporary !orkers fro an eployent agency rather than hiring part-tie
production eployees
". subcontracting portions of the project rather than purchasing ne! e'uipent to do all the
!ork in-house
C. leasing e'uipent on a long-ter basis rather than buying e'uipent
#. lo!ering the projected selling price per unit
E. changing the proposed labor-intensive production ethod to a ore capital intensive
ethod

... 1he degree of operating leverage is e'ual to:
A. the percentage change in 'uantity divided by the percentage change in 9CF.
". the percentage change in sales divided by the percentage change in 9CF.
C. 1 C FCD9CF.
#. 1 C )CD9CF.
E. 1 - EFC C )CFD9CF.

./. Gpto!n Prootions has three divisions. As part of the planning process4 the CF9
re'uested that each division subit its capital budgeting proposals for ne$t year. 1hese
proposals represent positive net present value projects that fall !ithin the long-range plans of
the fir. 1he re'uests fro the divisions are A-.% illion4 A+.1 illion4 and A/.2 illion4
respectively. For the fir as a !hole4 Gpto!n Prootions is liited to spending A17 illion
for ne! projects ne$t year. 1his is an e$aple of:
A. scenario analysis.
". sensitivity analysis.
C. deterining operating leverage.
#. soft rationing.
E. hard rationing.

11-1.
.0. "rubaker H :oss has received re'uests for capital investent funds for ne$t year fro
each of its five divisions. All re'uests represent positive net present value projects. All
projects are independent. &enior anageent has decided to allocate the available funds
based on the profitability inde$ of each project since the copany has insufficient funds to
fulfill all of the re'uests. =anageent is follo!ing a practice kno!n as:
C. leveraging.
#. hard rationing.
E. soft rationing.

.2. 1he CF9 of Ed!ard*s Food #istributors is continually receiving capital funding re'uests
fro its division anagers. 1hese re'uests are seeking funding for positive net present value
projects. 1he CF9 continues to deny all funding re'uests due to the financial situation of the
copany. Apparently4 the copany is:
A. operating at the accounting break-even point.
". operating at the financial break-even point.
C. facing hard rationing.
#. operating !ith 5ero leverage.
E. operating at a$iu capacity.

.3. Precise =achinery is analy5ing a proposed project. 1he copany e$pects to sell %4177
units4 give or take . percent. 1he e$pected variable cost per unit is A%/7 and the e$pected
fi$ed costs are A.234777. Cost estiates are considered accurate !ithin a plus or inus -
percent range. 1he depreciation e$pense is A1%34777. 1he sales price is estiated at A0.7 per
unit4 plus or inus % percent. 8hat is the sales revenue under the !orst case scenario6
A. A14/2/42%.
". A14-3/4%.7
C. A14-//4+%.
#. A14.-+4.77
E. A14/%74/0.

11-1/
/7. Precise =achinery is analy5ing a proposed project. 1he copany e$pects to sell %4177
unit4 give or take % percent. 8hat is the contribution argin per unit under the best case
scenario6
A. A%73..%
". A-3-./7
C. A-/3..%
#. A-37.77
E. A.1..-7

unit4 give or take % percent. 8hat is the aount of the total costs per unit under the !orst case
scenario6
A. A.-2..2
". A.00.-.
C. A/7-.1/
#. A/+2.%+
E. A/-7.%.

/%. Precise =achinery is analy5ing a proposed project. 1he copany e$pects to sell %4177
unit4 give or take % percent. 1he ta$ rate is +. percent. 1he copany is conducting a
sensitivity analysis on the sales price using a sales price estiate of A0... 8hat is the
operating cash flo! based on this analysis6
A. A++0430.
". A%3+4723
C. A2/4/0.
#. A+.-420-
E. A+/2471.

11-10
/+. Precise =achinery is analy5ing a proposed project. 1he copany e$pects to sell %4177
sensitivity analysis !ith fi$ed costs of A.374777. 8hat is the 9CF given this analysis6
A. A++0430.
". A%2.4+.7
C. A++74.77
#. A+.-420-
E. A-1-4+.7

/-. =iller =fg. is analy5ing a proposed project. 1he copany e$pects to sell 24777 units4 plus
or inus % percent. 1he e$pected variable cost per unit is A11 and the e$pected fi$ed costs are
A%204777. 1he fi$ed and variable cost estiates are considered accurate !ithin a plus or
inus . percent range. 1he depreciation e$pense is A/24777. 1he ta$ rate is +% percent. 1he
sales price is estiated at A/- a unit4 plus or inus + percent. 8hat is the earnings before
interest and ta$es under the base case scenario6
A. A-/43%7
". A3+41/7
C. A11-43%7
#. A/34777
E. A.24-27

/.. =iller =fg. is analy5ing a proposed project. 1he copany e$pects to sell 24777 units4 plus
sales price is estiated at A/- a unit4 give or take + percent. 8hat is the operating cash flo!
under the best case scenario6
A. A1--41.7
". A1-24-0.
C. A17041-/
#. A1/24/+7
E. A10-4%%7

11-12
//. =iller =fg. is analy5ing a proposed project. 1he copany e$pects to sell 24777 units4 plus
sales price is estiated at A/- a unit4 give or take + percent. 8hat is the net incoe under the
!orst case scenario6
A. A24.02
". A124%%2
C. A1.42-/
#. A%7407-
E. A%-4/3/

/0. &tellar Plastics is analy5ing a proposed project. 1he copany e$pects to sell 1%4777 units4
plus or inus + percent. 1he e$pected variable cost per unit is A+.%7 and the e$pected fi$ed
costs are A+74777. 1he fi$ed and variable cost estiates are considered accurate !ithin a plus
or inus . percent range. 1he depreciation e$pense is A%/4777. 1he ta$ rate is +- percent. 1he
sales price is estiated at A0..7 a unit4 plus or inus - percent. 8hat is the operating cash
flo! for a sensitivity analysis using total fi$ed costs of A+147776
A. A134.27
". A%%4-+/
C. A%04%17
#. A+14-/7
E. A+04.-7

/2. &unset Gnited is analy5ing a proposed project. 1he copany e$pects to sell 1.4777 units4
plus or inus - percent. 1he e$pected variable cost per unit is A1%7 and the e$pected fi$ed
costs are A+114777. 1he fi$ed and variable cost estiates are considered accurate !ithin a
plus or inus + percent range. 1he depreciation e$pense is A0-4777. 1he ta$ rate is +.
percent. 1he sales price is estiated at A107 a unit4 plus or inus % percent. 8hat is the
contribution argin per unit for a sensitivity analysis using a variable cost per unit of A1%.6
A. A+7
". A-.
C. A.7
#. A%-
E. A%0

11-13
/3. Bour copany is revie!ing a project !ith estiated labor costs of A%1.%7 per unit4
estiated ra! aterial costs of A+0.12 a unit4 and estiated fi$ed costs of A%74777 a onth.
&ales are projected at -%4777 units over the one-year life of the project. All estiates are
accurate !ithin a range of plus or inus . percent. 8hat are the total variable costs for the
!orst-case scenario6
A. A2374-77
". A14./14./7
C. A%4--.42+7
#. A%4-.143/7
E. A%4/3143/7

07. A project has earnings before interest and ta$es of A1-4/774 fi$ed costs of A.%47774 a
selling price of A%3 a unit4 and a sales 'uantity of 1/4777 units. All estiates are accurate
!ithin a plusDinus range of + percent. #epreciation is A1%4777. 8hat is the base case
variable cost per unit6
A. A%%.1/
". A%+.2-
C. A%-.73
#. A%-.%+
E. A%..12

01. At a production level of -4.77 units4 a project has total costs of A1724777. 1he variable
cost per unit is A11.%7. Assue the fir can increase production by 14777 units !ithout
increasing its fi$ed costs. 8hat !ill the total costs be if -4277 units are produced6
A. A17%4027
". A17-4/-7
C. A17/4-77
#. A1724777
E. A1114+/7

11-%7
0%. A copany is considering a project !ith a cash break-even point of %%4/77 units. 1he
selling price is A%2 a unit4 the variable cost per unit is A1+4 and depreciation is A1-4777. 8hat
is the projected aount of fi$ed costs6
A. A+%.4777
". A++34777
C. A+-%4777
#. A+-24777
E. A+.+4777

0+. At the accounting break-even point4 &!iss =ountain :ear sells 1-4/77 ski asks at a
price of A17 each. At this level of production4 the depreciation is A.24777 and the variable cost
per unit is A-. 8hat is the aount of the fi$ed costs at this production level6
A. A%34/77
". A.%4-77
C. A/14+77
#. A204/77
E. A1-.4/77

0-. 1he Coffee E$press has coputed its fi$ed costs to be A7.+- for every cup of coffee it
sells given annual sales of %1%4777 cups. 1he sales price is A1.-3 per cup !hile the variable
cost per cup is A7./+. ;o! any cups of coffee ust it sell to break-even on a cash basis6
A. 2+421-
". 3/4-07
C. 1%+4317
#. 1/04/+7
E. %1%4777

11-%1
0.. 1he =etal &hop produces 1.2 illion etal fasteners a year for industrial use. At this level
of production4 its total fi$ed costs are A+024777 and its total costs are A.%%4777. 1he fir can
increase its production by . percent4 !ithout increasing either its total fi$ed costs or its
variable costs per unit. A custoer has ade a one-tie offer for an additional .74777 units at
a price per unit of A7.17. &hould the fir sell the additional units at the offered price6 8hy or
!hy not6
A. yesI 1he offered price is less than the arginal cost.
". yesI 1he offered price is e'ual to the arginal cost.
C. yesI 1he offered price is greater than the arginal cost.
#. noI 1he offered price is less than the arginal cost.
E. noI 1he offered price is greater than the arginal cost.

0/. 8e$ford <ndustrial &upply is considering a ne! project !ith estiated depreciation of
A%/47774 fi$ed costs of A0347774 and total sales of A1204777. 1he variable costs per unit are
estiated at A11.27. 8hat is the accounting break-even level of production6
A. -4201 units
". .4+++ units
C. .4-1. units
#. /43-3 units
E. 04%-2 units

00. 1he accounting break-even production 'uantity for a project is 114/-7 units. 1he fi$ed
costs are A%1/4777 and the contribution argin per unit is A%2. 1he fi$ed assets re'uired for
the project !ill be depreciated on straight-line basis to 5ero over the project*s .-year life.
8hat is the aount of fi$ed assets re'uired for this project6
A. A+%.43%7
". A.-34/77
C. A0-24.77
#. A147274777
E. A14/%34/77

11-%%
02. A project has an accounting break-even point of 1.4+%3 units. 1he fi$ed costs are
A+2%4777 and the projected variable cost per unit is A%3.17. 1he project !ill re'uire A0274777
for fi$ed assets !hich !ill be depreciated straight-line to 5ero over the project*s /-year life.
8hat is the projected sales price per unit6
A. A-0./.
". A-2.12
C. A.-.7%
#. A././0
E. A/%..7

03. A proposed project has fi$ed costs of A342774 depreciation e$pense of A%40774 and a sales
'uantity of %4177 units. 1he total variable costs are A.4/70. 8hat is the contribution argin
per unit if the projected level of sales is the accounting break-even point6
A. A+.%2
". A-.70
C. A..3.
#. A/.1/
E. A0.11

27. &pencer 1ools !ould like to offer a special product to its best custoers. ;o!ever4 the
fir !ants to liit its a$iu potential loss on this product to the fir*s initial investent
in the project. 1he fi$ed costs are estiated at A%147774 the depreciation e$pense is A1147774
and the contribution argin per unit is A1%..7. 8hat is the iniu nuber of units the fir
should pre-sell to ensure its potential loss does not e$ceed the desired level6
A. 14%%7 units
". 14/27 units
C. %4%1. units
#. %4./7 units
E. %40.7 units

11-%+
21. 1he =otor 8orks is considering an e$pansion project !ith estiated annual fi$ed costs of
A0147774 depreciation of A+24.774 variable costs per unit of A10.37 and an estiated sales
price of A%2 per unit. ;o! any units ust the fir sell to break-even on a cash basis6
A. /4.%1 units
". 047+7 units
C. 04.17 units
#. 34//0 units
E. 1742-% units

2%. A proposed project has a contribution argin per unit of A1+.174 fi$ed costs of A0-47774
depreciation of A1%4.774 variable costs per unit of A%%4 and a financial break-even point of
114+/7 units. 8hat is the operating cash flo! at this level of output6
A. A7
". A1%4.77
C. A/%4+73
#. A0-421/
E. A2/4.77

2+. Cantor*s has been busy analy5ing a ne! product. 1hus far4 anageent has deterined
that an 9CF of A%124%77 !ill result in a 5ero net present value for the project4 !hich is the
iniu re'uireent for project acceptance. 1he fi$ed costs are A+%34777 and the
contribution argin per unit is A%1/.-7. 1he copany feels that it can realistically capture %..
percent of the 1174777 unit arket for this product. 1he ta$ rate is +- percent and the re'uired
rate of return is 11 percent. &hould the copany develop the ne! product6 8hy or !hy not6
A. BesI 1he project*s e$pected <@@ e$ceeds the re'uired rate of return.
". BesI 1he e$pected level of sales e$ceeds the re'uired level of production.
C. (oI 1he re'uired level of production e$ceeds the e$pected level of sales.
#. (oI 1he <@@ is less than the re'uired rate of return.
E. (oI 1he project !ill never payback on a discounted basis.

11-%-
2-. 1ucker*s 1rucking is considering a project !ith a discounted payback period just e'ual to
the project*s life. 1he projections include a sales price of A+24 variable cost per unit of A12..74
and fi$ed costs of A+%4777. 1he operating cash flo! is A134077. 8hat is the break-even
'uantity6
A. /+1 units
". 14%11 units
C. 14/-1 units
#. %4+71 units
E. %4/.1 units

2.. Bou are in charge of a project that has a degree of operating leverage of %./-. 8hat !ill
happen to the operating cash flo!s if the nuber of units you sell increase by / percent6
A. 1..2- percent decrease
". %.%0 percent decrease
C. no change
#. %.%0 percent increase
E. 1..2- percent increase

2/. 1he accounting anager of :ate!ay <nns has noted that every tie the inn*s average
occupancy rate increases by % percent4 the operating cash flo! increases by ..+ percent. 8hat
is the degree of operating leverage if the contribution argin per unit is A-06
A. 7.+2
". 7..0
C. 1.0.
#. %.17
E. %./.

11-%.
20. &teele <nsulators is analy5ing a ne! type of insulation for interior !alls. =anageent has
copiled the follo!ing inforation to deterine !hether or not this ne! insulation should be
anufactured. 1he insulation project has an initial fi$ed asset re'uireent of A1.+ illion4
!hich !ould be depreciated straight-line to 5ero over the 1%-year life of the project. Projected
fi$ed costs are A0-%4777 and the anticipated annual operating cash flo! is A%-14777. 8hat is
the degree of operating leverage for this project6
A. +.02
". +.3%
C. -.72
#. -.%0
E. -..+

22. Bou are the anager of a project that has a %.2 degree of operating leverage and a re'uired
return of 1- percent. #ue to the current state of the econoy4 you e$pect sales to decrease by
0 percent ne$t year. 8hat change should you e$pect in the operating cash flo!s ne$t year
given your sales prediction6
A. 13./7 percent decrease
". 1/.7+ percent decrease
C. 1+.-/ percent decrease
#. ../7 percent decrease
E. %.0- percent decrease

Essay Questions

23. 8hat is operating leverage and !hy is it iportant in the analysis of capital e$penditure
projects6

11-%/
37. 8hat is forecasting risk and !hy is it iportant to the analysis of capital e$penditure
projects6 8hat ethods can be used to reduce this risk6

31. 8hat are the key features of the accounting4 cash4 and financial break-even points6

3%. Assue that a country e$periences a financial crisis that causes the nation*s financial
arkets to free5e in a anner that prevents a private fir fro raising capital fro any
source. E$plain ho! project analysis conducted by that fir !ould !ork in this situation.

3+. =r. "ear4 your boss4 !ill only agree to accept a project that4 as a iniu4 provides a rate
of return e'ual to the re'uireent he has set for the project. :iven this4 e$plain ho! you can
use break-even analysis to ascertain !hich projects !ill be acceptable to hi as you don*t
!ant to risk hearing hi gro!l if you !aste his tie presenting hi !ith a project that is
unacceptable.

11-%0

3-. Cool &hades4 <nc. EC&<F anufactures biotech sunglasses. 1he variable aterials cost is
A1./3 per unit4 and the variable labor cost is A+.7- per unit. &uppose the fir incurs fi$ed
costs of A0.74777 during a year in !hich total production is -.74777 units and the selling
price is A11..7 per unit. 8hat is the cash break-even point6
A. 0/4-.+ units
". 224/.% units
C. 117402+ units
#. 1%24370 units
E. 1-740/2 units

3.. =ountain :ear can anufacture ountain clibing shoes for A1-.3. per pair in variable
ra! aterial costs and A12.-/ per paid in variable labor costs. 1he shoes sell for A1%0 per
pair. >ast year4 production !as 1074777 pairs and fi$ed costs !ere A2+74777. 8hat is the
iniu acceptable total revenue the copany should accept for a one-tie order for an
e$tra 174777 pairs6
A. A1-34.77
". A%204/77
C. A++-4177
#. A+274%11
E. A141/-4177

3/. 8e are evaluating a project that costs A2.-47774 has a 1.-year life4 and has no salvage
value. Assue that depreciation is straight-line to 5ero over the life of the project. &ales are
projected at 1.-4777 units per year. Price per unit is A-14 variable cost per unit is A%74 and
fi$ed costs are A2/.417% per year. 1he ta$ rate is ++ percent4 and !e re'uire a 1- percent
return on this project. &uppose the projections given for price4 'uantity4 variable costs4 and
fi$ed costs are all accurate to !ithin 1- percent. 8hat is the !orst-case (P)6
A. A32-4/1+
". A14%/04772
C. A14-234.11
#. A1402%4-73
E. A1433+4207

11-%2
30. A project has a unit price of A.47774 a variable cost per unit of A-47774 fi$ed costs of
A10477747774 and depreciation e$pense of A/43074777. 8hat is the accounting break-even
'uantity6
A. /4307 units
". 1747+7 units
C. 104777 units
#. %14-07 units
E. %+4307 units

32. A project has the follo!ing estiated data: price J A0- per unitI variable costs J A+3.%%
per unitI fi$ed costs J A/4.77I re'uired return J 2 percentI initial investent J A24777I life J -
years. <gnore the effect of ta$es. 8hat is the degree of operating leverage at the financial
break-even level of output6
A. %.01/
". +./31
C. -..%2
#. /.77+
E. 0.++0

33. Consider a project !ith the follo!ing data: accounting break-even 'uantity J %34777
unitsI cash break-even 'uantity J 1.43.7 unitsI life J 17 yearsI fi$ed costs J A%7+4777I
variable costs J A%- per unitI re'uired return J 1- percentI depreciation J straight line.
<gnoring the effect of ta$es4 !hat is the financial break-even 'uantity6
A. +240%+ units
". +34%71 units
C. +34-.2 units
#. +34/%- units
E. -743/3 units

177. At an output level of .74777 units4 you calculate that the degree of operating leverage is
1.2. 8hat !ill be the percentage change in operating cash flo! if the ne! output level is
.-4.77 units6
A. ..77 percent
". /.10 percent
C. 1/.%7 percent
#. 10.-+ percent
E. %7.77 percent

11-%3
171. A proposed project has fi$ed costs of A+/4777 per year. 1he operating cash flo! at
124777 units is A/04777. 8hat !ill be the ne! degree of operating leverage if the nuber of
units sold rises to 124.776
A. 1.-/
". 1..%
C. 1./0
#. %.72
E. %.1-

17%. Consider a /-year project !ith the follo!ing inforation: initial fi$ed asset investent J
A-/74777I straight-line depreciation to 5ero over the /-year lifeI 5ero salvage valueI price J
A+-I variable costs J A13I fi$ed costs J A1224/77I 'uantity sold J 374.%2 unitsI ta$ rate J +%
percent. 8hat is the sensitivity of 9CF to changes in 'uantity sold6
A. A17.%7 per unit
". A11.1/ per unit
C. A11.+2 per unit
#. A1%.++ per unit
E. A1%..- per unit

17+. Bou are considering a ne! product launch. 1he project !ill cost A/+747774 have a .-year
life4 and have no salvage valueI depreciation is straight-line to 5ero. &ales are projected at 1/7
units per year4 price per unit !ill be A%-47774 variable cost per unit !ill be A1%47774 and fi$ed
costs !ill be A%2+4777 per year. 1he re'uired return is 11 percent and the relevant ta$ rate is
+- percent. "ased on your e$perience4 you think the unit sales4 variable cost4 and fi$ed cost
projections given here are probably accurate to !ithin 3 percent. 8hat is the !orst case
(P)6
A. A+4-104370
". A%4/.-4%-1
C. A2224/12
#. A+417%41+-
E. A+4-.247%7

11-+7
17-. =c:illa :olf has decided to sell a ne! line of golf clubs. 1he clubs !ill sell for A.77 per
set and have a variable cost of A%77 per set. 1he copany spent A11+4777 for a arketing
study that deterined the copany !ill sell .24777 sets per year for 0 years. 1he arketing
study also deterined that the copany !ill lose sales of 1.4777 sets of its high-priced clubs.
1he high-priced clubs sell at A077 and have variable costs of A+77. 1he copany !ill also
increase sales of its cheap clubs by 34777 sets. 1he cheap clubs sell for A%77 and have variable
costs of A177 per set. 1he fi$ed costs each year !ill be A04..34777. 1he copany has also
spent A141++4777 on research and developent for the ne! clubs. 1he plant and e'uipent
re'uired !ill cost A%147774777 and !ill be depreciated on a straight-line basis. 1he ne! clubs
!ill also re'uire an increase in net !orking capital of A147.+4777 that !ill be returned at the
end of the project. 1he ta$ rate is -7 percent4 and the cost of capital is 2 percent. 8hat is the
<@@6
A. 0..1 percent
". 0.2% percent
C. 2.1+ percent
#. 2.-3 percent
E. 2./% percent

17.. ;ybrid cars are touted as a ?green? alternativeI ho!ever4 the financial aspects of hybrid
o!nership are not as clear. Consider a hybrid odel that has a list price of A.4-%7 Eincluding
ta$ conse'uencesF ore than a coparable car !ith a traditional gasoline engine.
Additionally4 the annual o!nership costs Eother than fuelF for the hybrid !ere e$pected to be
A-%7 ore than the traditional odel. 1he EPA ileage estiate is %+ pg for the traditional
odel and %. pg for the hybrid odel. Assue the appropriate interest rate is 17 percent4 all
cash flo!s occur at the end of the year4 you drive 1.4377 iles per year4 and keep either car
for / years. 8hat price per gallon !ould ake the decision to buy they hybrid !orth!hile6
A. A12.03
". A%1.-2
C. A%0.13
#. A%2.+%
E. A+7.17

11-+1
17/. <n an effort to capture the large jet arket4 ;iro Airplanes invested A1%./2 billion
developing its "-374 !hich is capable of carrying 277 passengers. 1he plane has a list price of
A%0. illion. <n discussing the plane4 ;iro Airplanes stated that the copany !ould break-
even !hen %-/ "-37s !ere sold. Assue the break-even sales figure given is the cash flo!
break-even. &uppose the sales of the "-37 last for only 3 years. ;o! any airplanes ust
;iro Airplanes sell per year to provide its shareholders a 13 percent rate of return on this
investent6
A. -0.10
". .%.-2
C. .3.73
#. /+.17
E. /2.-7

11-+%
Chapter 11 Project Analysis and Evaluation Ans!er Key


1. Forecasting risk is defined as the possibility that:
A. soe proposed projects !ill be rejected.
". soe proposed projects !ill be teporarily delayed.
C. incorrect decisions !ill be ade due to erroneous cash flo! projections.
#. soe projects !ill be utually e$clusive.
E. ta$ rates could change over the life of a project.
@efer to section 11.1

AACSB: N/A
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Difficulty: Basic
Learning Obecti!e: ""#"
Section: ""$"
%o&ic: 'orecasting ris(

%. &cenario analysis is defined as the:
A. deterination of the initial cash outlay re'uired to ipleent a project.
B. deterination of changes in (P) estiates !hen !hat-if 'uestions are posed.
C. isolation of the effect that a single variable has on the (P) of a project.
#. separation of a project*s sunk costs fro its opportunity costs.
E. analysis of the effects that a project*s terinal cash flo!s has on the project*s (P).
@efer to section 11.%

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%o&ic: Scenario analysis

11-++
+. An analysis of the change in a project*s (P) !hen a single variable is changed is called
,,,,, analysis.
A. forecasting
". scenario
C. sensitivity
#. siulation
E. break-even

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%o&ic: Sensiti!ity analysis

-. An analysis !hich cobines scenario analysis !ith sensitivity analysis is called ,,,,,
analysis.
A. forecasting
". cobined
C. cople$
D. siulation
E. break-even

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%o&ic: Simulation analysis

11-+-
.. )ariable costs can be defined as the costs that:
A. reain constant for all tie periods.
". reain constant over the short run.
C. vary directly !ith sales.
#. are classified as non-cash e$penses.
E. are inversely related to the nuber of units sold.
@efer to section 11.+

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%o&ic: +ariable costs

/. Fi$ed costs:
A. change as a sall 'uantity of output produced changes.
B. are constant over the short-run regardless of the 'uantity of output produced.
C. are defined as the change in total costs !hen one ore unit of output is produced.
#. are subtracted fro sales to copute the contribution argin.
E. can be ignored in scenario analysis since they are constant over the life of a project.

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%o&ic: 'i,ed costs

11-+.
0. 1he change in revenue that occurs !hen one ore unit of output is sold is referred to as:
A. arginal revenue.
". average revenue.
C. total revenue.
#. erosion.
E. scenario revenue.

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%o&ic: -arginal re!enue

2. 1he change in variable costs that occurs !hen production is increased by one unit is
referred to as the:
A. arginal cost.
". average cost.
C. total cost.
#. scenario cost.
E. net cost.

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%o&ic: -arginal cost

11-+/
3. "y definition4 !hich one of the follo!ing ust e'ual 5ero at the accounting break-even
point6
D. net incoe

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%o&ic: Accounting brea(#e!en

17. "y definition4 !hich one of the follo!ing ust e'ual 5ero at the cash break-even point6
#. net incoe
@efer to section 11.-

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%o&ic: Cas/ brea(#e!en

11-+0
11. 8hich one of the follo!ing is defined as the sales level that corresponds to a 5ero (P)6
A. accounting break-even
". leveraged break-even
C. arginal break-even
#. cash break-even
E. financial break-even

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%o&ic: 'inancial brea(#e!en

1%. 9perating leverage is the degree of dependence a fir places on its:
A. variable costs.
B. fi$ed costs.
C. sales.
#. operating cash flo!s.
E. net !orking capital.
@efer to section 11..

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%o&ic: O&erating le!erage

11-+2
1+. 8hich one of the follo!ing is the relationship bet!een the percentage change in operating
cash flo! and the percentage change in 'uantity sold6
A. degree of sensitivity
B. degree of operating leverage
#. cash break-even
E. contribution argin

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%o&ic: Degree of o&erating le!erage

1-. "ell 8eather :oods has several proposed independent projects that have positive (P)s.
;o!ever4 the fir cannot initiate any of the projects due to a lack of financing. 1his situation
is referred to as:
A. financial rejection.
". project rejection.
C. soft rationing.
E. capital rationing.
@efer to section 11./

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%o&ic: Ca&ital rationing

11-+3
1.. 1he procedure of allocating a fi$ed aount of funds for capital spending to each business
unit is called:
A. arginal spending.
". capital preservation.
C. soft rationing.
#. hard rationing.
E. arginal rationing.

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%o&ic: Soft rationing

1/. PC Enterprises !ants to coence a ne! project but is unable to obtain the financing
under any circustances. 1his fir is facing:
A. financial deferral.
". financial allocation.
C. capital allocation.
E. hard rationing.

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%o&ic: 2ard rationing

11--7
10. Forecasting risk ephasi5es the point that the correctness of any decision to accept or
reject a project is highly dependent upon the:
A. ethod of analysis used to ake the decision.
". initial cash outflo!.
C. ability to recoup any investent in net !orking capital.
D. accuracy of the projected cash flo!s.
E. length of the project.
@efer to section 11.1

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%o&ic: 'orecasting ris(

12. &teve is fairly cautious !hen analy5ing a ne! project and thus he projects the ost
optiistic4 the ost realistic4 and the ost pessiistic outcoe that can reasonably be
e$pected. 8hich type of analysis is &teve using6
A. siulation testing
". sensitivity analysis
C. break-even analysis
#. rationing analysis
E. scenario analysis

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Section: ""$)

11--1
13. &cenario analysis is best suited to accoplishing !hich one of the follo!ing !hen
analy5ing a project6
A. deterining ho! fi$ed costs affect (P)
". estiating the residual value of fi$ed assets
C. identifying the potential range of reasonable outcoes
#. deterining the inial level of sales re'uired to break-even on an accounting basis
E. deterining the inial level of sales re'uired to break-even on a financial basis

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Section: ""$)

%7. 8hich one of the follo!ing !ill be used in the coputation of the best-case analysis of a
proposed project6
A. inial nuber of units that are e$pected to be produced and sold
". the lo!est e$pected salvage value that can be obtained for a project*s fi$ed assets
C. the ost anticipated sales price per unit
D. the lo!est variable cost per unit that can reasonably be e$pected
E. the highest level of fi$ed costs that is actually anticipated

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Section: ""$)

11--%
%1. 1he base case values used in scenario analysis are the ones considered the ost:
A. optiistic.
". desired by anageent.
C. pessiistic.
#. conducive to creating a positive net present value.
E. likely to occur.

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%%. 8hich of the follo!ing variables !ill be at their highest e$pected level under a !orst case
scenario6
<. fi$ed cost
<<. sales price
<<<. variable cost
<). sales 'uantity
A. < only
". <<< only
C. << and <<< only
D. < and <<< only
E. <4 <<<4 and <) only

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Section: ""$)

11--+
%+. 8hen you assign the lo!est anticipated sales price and the highest anticipated costs to a
project4 you are analy5ing the project under the condition kno!n as:
A. best case sensitivity analysis.
". !orst case sensitivity analysis.
C. best case scenario analysis.
D. !orst case scenario analysis.
E. base case scenario analysis.

AACSB: N/A
Difficulty: Basic
Section: ""$)

%-. 8hich one of the follo!ing stateents concerning scenario analysis is correct6
A. 1he pessiistic case scenario deterines the a$iu loss4 in current dollars4 that a fir
could possibly incur fro a given project.
". &cenario analysis defines the entire range of results that could be reali5ed fro a proposed
investent project.
C. &cenario analysis deterines !hich variable has the greatest ipact on a project*s final
outcoe.
D. &cenario analysis helps anagers analy5e various outcoes that are possible given
reasonable ranges for each of the assuptions.
E. =anageent is guaranteed a positive outcoe for a project !hen the !orst case scenario
produces a positive (P).

AACSB: N/A
Difficulty: 3ntermediate
Section: ""$)

11---
%.. &ensitivity analysis deterines the:
A. range of possible outcoes given that ost variables are reliable only !ithin a stated
range.
B. degree to !hich the net present value reacts to changes in a single variable.
C. net present value range that can be reali5ed fro a proposed project.
#. degree to !hich a project relies on its fi$ed costs.
E. ideal ratio of variable costs to fi$ed costs for profit a$ii5ation.

AACSB: N/A
Difficulty: Basic
Section: ""$)

%/. Assue you graph a project*s net present value given various sales 'uantities. 8hich one
of the follo!ing is correct regarding the resulting function6
A. 1he steepness of the function relates to the project*s degree of operating leverage.
". 1he steeper the function4 the less sensitive the project is to changes in the sales 'uantity.
C. 1he resulting function !ill be a hyperbole.
#. 1he resulting function !ill include only positive values.
E. 1he slope of the function easures the sensitivity of the net present value to a change in
sales 'uantity.

AACSB: N/A
Difficulty: Basic
Section: ""$)

11--.
%0. As the degree of sensitivity of a project to a single variable rises4 the:
A. less iportant the variable to the final outcoe of the project.
". less volatile the project*s net present value to that variable.
C. greater the iportance of accurately predicting the value of that variable.
#. greater the sensitivity of the project to the other variable inputs.
E. less volatile the project*s outcoe.

AACSB: N/A
Difficulty: Basic
Section: ""$)

%2. &ensitivity analysis is based on:
A. varying a single variable and easuring the resulting change in the (P) of a project.
". applying differing discount rates to a project*s cash flo!s and easuring the effect on the
(P).
C. e$panding and contracting the nuber of years for a project to deterine the optial
project length.
#. the best4 !orst4 and ost e$pected situations.
E. various states of the econoy and the probability of each state occurring.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$)

11--/
%3. 8hich type of analysis identifies the variable4 or variables4 that are ost critical to the
success of a particular project6
A. leverage
". risk
C. break-even
D. sensitivity
E. cash flo!

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$)

+7. &iulation analysis is based on assigning a ,,,,, and analy5ing the results.
A. narro! range of values to a single variable
". narro! range of values to ultiple variables siultaneously
C. !ide range of values to a single variable
D. !ide range of values to ultiple variables siultaneously
E. single value to each of the variables

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$)

11--0
+1. 8hich one of the follo!ing types of analysis is the ost cople$ to conduct6
A. scenario
". break-even
C. sensitivity
#. degree of operating leverage
E. siulation

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$)

+%. 1ed is analy5ing a project using siulation. ;is focus is liited to the short-ter. 1o ease
the siulation process4 he is cobining e$penses into various categories. 8hich one of the
follo!ing should he include in the fi$ed cost category6
A. production departent payroll ta$es
B. e'uipent insurance
C. sales ta$
#. ra! aterials
E. product shipping costs

AACSB: N/A
Difficulty: Basic
Section: ""$)

11--2
++. 8hich one of the follo!ing stateents concerning variable costs is correct6
A. )ariable costs inus fi$ed costs e'ual arginal costs.
". )ariable costs are e'ual to fi$ed costs !hen production is e'ual to 5ero.
C. An increase in variable costs increases the operating cash flo!.
#. )ariable costs are inversely related to fi$ed costs.
E. )ariable costs per unit are inversely related to the contribution argin per unit.

AACSB: N/A
Difficulty: Basic
Section: ""$*

+-. 8hich of the follo!ing are inversely related to variable costs per unit6
<. contribution argin per unit
<<. nuber of units sold
<<<. operating cash flo! per unit
<). net profit per unit
A. < and << only
". <<< and <) only
C. <<4 <<<4 and <) only
D. <4 <<<4 and <) only
E. <4 <<4 <<<4 and <)

AACSB: N/A
Section: ""$*

11--3
+.. &teve4 the sales anager for 1> Products4 !ants to sponsor a one-!eek ?Custoer
Appreciation &ale? !here the fir offers to sell additional units of a product at the lo!est
price possible !ithout negatively affecting the fir*s profits. 8hich one of the follo!ing
represents the price that should be charged for the additional units during this sale6
A. average variable cost
". average total cost
C. average total revenue
#. arginal revenue
E. arginal cost

AACSB: N/A
Difficulty: Basic
Section: ""$*

+/. 1he president of :lobal 8holesalers !ould like to offer special sale prices to the fir*s
best custoers under the follo!ing ters:
1. 1he prices !ill apply only to units purchased in e$cess of the 'uantity norally purchased
by a custoer.
%. 1he units purchased ust be paid for in cash at the tie of sale.
+. 1he total 'uantity sold under these ters cannot e$ceed the e$cess capacity of the fir.
-. 1he net profit of the fir should not be affected.
.. 1he prices !ill be in effect for one !eek only.
:iven these conditions4 the special sale price should be set e'ual to the:
A. average variable cost of aterials only.
". average cost of all variable inputs.
C. sensitivity value of the variable costs.
#. arginal cost of aterials only.
E. arginal cost of all variable inputs.

AACSB: N/A
Difficulty: Basic
Section: ""$*

11-.7
+0. 1he contribution argin per unit is e'ual to the:
A. sales price per unit inus the total costs per unit.
". variable cost per unit inus the fi$ed cost per unit.
C. sales price per unit inus the variable cost per unit.
#. pre-ta$ profit per unit.
E. afterta$ profit per unit.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$*
%o&ic: Contribution margin

+2. 8hich of the follo!ing values !ill be e'ual to 5ero !hen a fir is producing the
accounting break-even level of output6
<. operating cash flo!
<<. internal rate of return
<<<. net incoe
<). payback period
A. < only
". <<< only
C. << and <<< only
#. < and <) only
E. <4 <<4 and <<< only

AACSB: N/A
Section: ""$*

11-.1
+3. An increase in !hich of the follo!ing !ill increase the accounting break-even 'uantity6
Assue straight-line depreciation is used.
<. annual salary for the fir*s president
<<. contribution argin per unit
<<<. cost of e'uipent re'uired by a project
<). variable cost per unit
A. < and <<< only
". < and <) only
C. << and <<< only
D. <4 <<<4 and <) only
E. <4 <<4 and <) only

AACSB: N/A
Bloom's: Analysis
Section: ""$*

-7. 8ebster <ron 8orks started a ne! project last year. As it turns out4 the project has been
operating at its accounting break-even level of output and is no! e$pected to continue at that
level over its lifetie. :iven this4 you kno! that the project:
A. !ill never pay back.
". has a 5ero net present value.
C. is operating at a higher level than if it !ere operating at its cash break-even level.
#. is operating at a higher level than if it !ere operating at its financial break-even level.
E. is lo!ering the total net incoe of the fir.

AACSB: N/A
Bloom's: Analysis
Section: ""$*

11-.%
-1. :iven the follo!ing4 !hich feature identifies the ost desirable level of output for a
project6
A. operating cash flo! e'ual to the depreciation e$pense
". payback period e'ual to the project*s life
C. discounted payback period e'ual to the project*s life
#. 5ero <@@
E. 5ero operating cash flo!
@efer to sections 11.+ and 11.-

AACSB: N/A
Bloom's: Analysis
Section: ""$* and ""$.
%o&ic: Brea(#e!en le!els

-%. At the accounting break-even point4 the:
A. payback period ust e'ual the re'uired payback period.
". (P) is 5ero.
C. <@@ is 5ero.
#. contribution argin per unit e'uals the fi$ed costs per unit.
E. contribution argin per unit is 5ero.

AACSB: N/A
Difficulty: Basic
Section: ""$*

11-.+
-+. A project has a payback period that e$actly e'uals the project*s life. 1he project is
operating at:
A. its a$iu capacity.
". the financial break-even point.
C. the cash break-even point.
D. the accounting break-even point.
E. a 5ero level of output.

AACSB: N/A
Difficulty: Basic
Section: ""$*

--. )alerie just copleted analy5ing a project. ;er analysis indicates that the project !ill have
a /-year life and re'uire an initial cash outlay of A+%74777. Annual sales are estiated at
A.234777 and the ta$ rate is +- percent. 1he net present value is a negative A+%74777. "ased
on this analysis4 the project is e$pected to operate at the:

AACSB: N/A
Difficulty: Basic
Section: ""$.

11-.-
-.. A project has a projected <@@ of negative 177 percent. 8hich one of the follo!ing
stateents ust also be true concerning this project6
A. 1he discounted payback period e'uals the life of the project.
". 1he operating cash flo! is positive and e'ual to the depreciation.
C. 1he net present value of the project is negative and e'ual to the initial investent.
#. 1he payback period is e$actly e'ual to the life of the project.
E. 1he net present value of the project is e'ual to 5ero.

AACSB: N/A
Section: ""$.

-/. 8hich of the follo!ing characteristics relate to the cash break-even point for a given
project6
<. 1he project never pays back.
<<. 1he <@@ e'uals the re'uired rate of return.
<<<. 1he (P) is negative and e'ual to the initial cash outlay.
<). 1he operating cash flo! is e'ual to the depreciation e$pense.
A. < and <<< only
". << and <) only
C. <4 <<4 and <<< only
#. <<4 <<<4 and <) only
E. <4 <<4 <<<4 and <)

AACSB: N/A
Difficulty: Basic
Section: ""$.

11-..
-0. 8hen the operating cash flo! of a project is e'ual to 5ero4 the project is operating at the:

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$.

-2. 8hich one of the follo!ing represents the level of output !here a project produces a rate
of return just e'ual to its re'uireent6
A. capital break-even
". cash break-even
D. financial break-even
E. internal break-even

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$.

11-./
-3. 8hich of the follo!ing stateents are identified !ith financial break-even point6
<. 1he present value of the cash inflo!s e$actly offsets the initial cash outflo!.
<<. 1he payback period is e'ual to the life of the project.
<<<. 1he (P) is 5ero.
<). 1he discounted payback period e'uals the life of the project.
A. < and << only
". < and <<< only
C. << and <) only
#. <4 <<4 and <<< only
E. <4 <<<4 and <) only

AACSB: N/A
Section: ""$.

.7. Bou !ould like to kno! the iniu level of sales that is needed for a project to be
accepted based on its net present value. 1o deterine that sales level you should copute the:
A. contribution argin per unit and set that argin e'ual to the fi$ed costs per unit.
". contribution argin per unit.
C. accounting break-even point.
#. cash break-even point.
E. financial break-even point.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$.

11-.0
.1. 1heresa is analy5ing a project that currently has a projected (P) of 5ero. 8hich of the
follo!ing changes that she is considering !ill help that project produce a positive (P)
instead6 Consider each change independently.
<. increase the 'uantity sold
<<. decrease the fi$ed leasing cost for e'uipent
<<<. decrease the labor hours needed to produce one unit
<). increase the sales price
A. < and << only
". < and <) only
C. <<4 <<<4 and <) only
#. <4 <<4 and <) only
E. <4 <<4 <<<4 and <)

AACSB: N/A
Bloom's: Analysis
Section: ""$.

.%. Bou are considering a project that you believe is 'uite risky. 1o reduce any potentially
harful results fro accepting this project4 you could:
A. lo!er the degree of operating leverage.
". lo!er the contribution argin per unit.
C. increase the initial cash outlay.
#. increase the fi$ed costs per unit !hile lo!ering the contribution argin per unit.
E. lo!er the operating cash flo! of the project.

AACSB: N/A
Bloom's: Analysis
Section: ""$0

11-.2
.+. 8hich one of the follo!ing characteristics best describes a project that has a lo! degree
of operating leverage6
A. high variable costs relative to the fi$ed costs
". relatively high initial cash outlay
C. an 9CF that is highly sensitive to the sales 'uantity
#. high level of forecasting risk
E. a high depreciation e$pense

AACSB: N/A
Bloom's: Analysis
Section: ""$0

.-. 8hich one of the follo!ing !ill best reduce the risk of a project by lo!ering the degree of
operating leverage6
A. hiring teporary !orkers fro an eployent agency rather than hiring part-tie
production eployees
B. subcontracting portions of the project rather than purchasing ne! e'uipent to do all the
!ork in-house
C. leasing e'uipent on a long-ter basis rather than buying e'uipent
#. lo!ering the projected selling price per unit
E. changing the proposed labor-intensive production ethod to a ore capital intensive
ethod

AACSB: N/A
Bloom's: Analysis
Section: ""$0

11-.3
... 1he degree of operating leverage is e'ual to:
A. the percentage change in 'uantity divided by the percentage change in 9CF.
". the percentage change in sales divided by the percentage change in 9CF.
C. 1 C FCD9CF.
#. 1 C )CD9CF.
E. 1 - EFC C )CFD9CF.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$0

./. Gpto!n Prootions has three divisions. As part of the planning process4 the CF9
re'uested that each division subit its capital budgeting proposals for ne$t year. 1hese
proposals represent positive net present value projects that fall !ithin the long-range plans of
the fir. 1he re'uests fro the divisions are A-.% illion4 A+.1 illion4 and A/.2 illion4
respectively. For the fir as a !hole4 Gpto!n Prootions is liited to spending A17 illion
for ne! projects ne$t year. 1his is an e$aple of:
C. deterining operating leverage.
D. soft rationing.
E. hard rationing.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$1

11-/7
.0. "rubaker H :oss has received re'uests for capital investent funds for ne$t year fro
each of its five divisions. All re'uests represent positive net present value projects. All
projects are independent. &enior anageent has decided to allocate the available funds
based on the profitability inde$ of each project since the copany has insufficient funds to
fulfill all of the re'uests. =anageent is follo!ing a practice kno!n as:
C. leveraging.
#. hard rationing.
E. soft rationing.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: ""$1

.2. 1he CF9 of Ed!ard*s Food #istributors is continually receiving capital funding re'uests
fro its division anagers. 1hese re'uests are seeking funding for positive net present value
projects. 1he CF9 continues to deny all funding re'uests due to the financial situation of the
copany. Apparently4 the copany is:
A. operating at the accounting break-even point.
". operating at the financial break-even point.
C. facing hard rationing.
#. operating !ith 5ero leverage.
E. operating at a$iu capacity.

AACSB: N/A
Section: ""$1

11-/1
.3. Precise =achinery is analy5ing a proposed project. 1he copany e$pects to sell %4177
unit4 plus or inus % percent. 8hat is the sales revenue under the !orst case scenario6
A. A14/2/42%.
". A14-3/4%.7
C. A14-//4+%.
#. A14.-+4.77
E. A14/%74/0.
&ales8orst case J E%4177 7.3.F EA0.7 .32F J A14-//4+%.

AACSB: Analytic
Bloom's: A&&lication
Difficulty: Basic
Section: ""$)

unit4 give or take % percent. 8hat is the contribution argin per unit under the best case
scenario6
A. A%73..%
". A-3-./7
C. A-/3..%
#. A-37.77
E. A.1..-7
Contribution arginbest case J EA0.7 1.7%F - EA%/7 7.3/F J A.1..-7

AACSB: Analytic
Difficulty: Basic
Section: ""$)
%o&ic: Contribution margin

11-/%
unit4 give or take % percent. 8hat is the aount of the total costs per unit under the !orst case
scenario6
A. A.-2..2
B. A.00.-.
C. A/7-.1/
#. A/+2.%+
E. A/-7.%.
1otal costs per unit!orst case J LEA%4177 7.3.F E%/7 1.7-F C EA.234777 1.7-FMDE%4177 7.3.F
J A.00.-.

AACSB: Analytic
Bloom's: Analysis
Section: ""$)

/%. Precise =achinery is analy5ing a proposed project. 1he copany e$pects to sell %4177
sensitivity analysis on the sales price using a sales price estiate of A0... 8hat is the
operating cash flo! based on this analysis6
A. A++0430.
". A%3+4723
C. A2/4/0.
#. A+.-420-
E. A+/2471.
9CF NLE0.. - A%/7F %4177M - A.234777O N1 - 7.+.O C EA1%34777 7.+.F J A++0430.

AACSB: Analytic
Bloom's: Analysis
Section: ""$)

11-/+
/+. Precise =achinery is analy5ing a proposed project. 1he copany e$pects to sell %4177
sensitivity analysis !ith fi$ed costs of A.374777. 8hat is the 9CF given this analysis6
A. A++0430.
". A%2.4+.7
C. A++74.77
#. A+.-420-
E. A-1-4+.7
9CF NLE0.7 - A%/7F %4177M - A.374777O N1 - 7.+.O C EA1%34777 7.+.F J A++74.77

AACSB: Analytic
Bloom's: Analysis
Section: ""$)

/-. =iller =fg. is analy5ing a proposed project. 1he copany e$pects to sell 24777 units4 plus
sales price is estiated at A/- a unit4 plus or inus + percent. 8hat is the earnings before
interest and ta$es under the base case scenario6
A. A-/43%7
". A3+41/7
C. A11-43%7
D. A/34777
E. A.24-27
E"<1 for base case J L24777 EA/- - A11FM - A%204777 - A/24777 J A/34777

AACSB: Analytic
Difficulty: Basic
Section: ""$)

11-/-
/.. =iller =fg. is analy5ing a proposed project. 1he copany e$pects to sell 24777 units4 plus
sales price is estiated at A/- a unit4 give or take + percent. 8hat is the operating cash flo!
under the best case scenario6
A. A1--41.7
". A1-24-0.
C. A17041-/
#. A1/24/+7
E. A10-4%%7
9CFbest case J NNLEA/- 1.7+F - EA11 7.3.FM E24777 1.7%FO - EA%204777 7.3.FO N1 - 7.+%O
C EA/24777 7.+%F J A1--41.7

AACSB: Analytic
Bloom's: Analysis
Section: ""$)

//. =iller =fg. is analy5ing a proposed project. 1he copany e$pects to sell 24777 units4 plus
sales price is estiated at A/- a unit4 give or take + percent. 8hat is the net incoe under the
!orst case scenario6
A. A24.02
B. A124%%2
C. A1.42-/
#. A%7407-
E. A%-4/3/
(et incoe!orst J NNLEA/- 7.30F - EA11 1.7.FM E24777 7.32FO - EA%204777 1.7.F -
A/24777O N1 - 7.+%O J A124%%2

AACSB: Analytic
Bloom's: Analysis
Section: ""$)

11-/.
/0. &tellar Plastics is analy5ing a proposed project. 1he copany e$pects to sell 1%4777 units4
plus or inus + percent. 1he e$pected variable cost per unit is A+.%7 and the e$pected fi$ed
costs are A+74777. 1he fi$ed and variable cost estiates are considered accurate !ithin a plus
or inus . percent range. 1he depreciation e$pense is A%/4777. 1he ta$ rate is +- percent. 1he
sales price is estiated at A0..7 a unit4 plus or inus - percent. 8hat is the operating cash
flo! for a sensitivity analysis using total fi$ed costs of A+147776
A. A134.27
B. A%%4-+/
C. A%04%17
#. A+14-/7
E. A+04.-7
9CF J LE1%4777 EA0..7 - A+.%7FM - A+14777ML1- 7.+-M CEA%/4777 7.+-F J A%%4-+/

AACSB: Analytic
Difficulty: Basic
Section: ""$)

/2. &unset Gnited is analy5ing a proposed project. 1he copany e$pects to sell 1.4777 units4
plus or inus - percent. 1he e$pected variable cost per unit is A1%7 and the e$pected fi$ed
costs are A+114777. 1he fi$ed and variable cost estiates are considered accurate !ithin a
plus or inus + percent range. 1he depreciation e$pense is A0-4777. 1he ta$ rate is +.
percent. 1he sales price is estiated at A107 a unit4 plus or inus % percent. 8hat is the
contribution argin per unit for a sensitivity analysis using a variable cost per unit of A1%.6
A. A+7
B. A-.
C. A.7
#. A%-
E. A%0
Contribution argin J A107 - A1%. J A-.

AACSB: Analytic
Difficulty: Basic
Section: ""$)

11-//
/3. Bour copany is revie!ing a project !ith estiated labor costs of A%1.%7 per unit4
estiated ra! aterial costs of A+0.12 a unit4 and estiated fi$ed costs of A%74777 a onth.
&ales are projected at -%4777 units over the one-year life of the project. All estiates are
accurate !ithin a range of plus or inus . percent. 8hat are the total variable costs for the
!orst-case scenario6
A. A2374-77
". A14./14./7
C. A%4--.42+7
#. A%4-.143/7
E. A%4/3143/7
1otal variable costs J LEA%1.%7 C A+0.12F 1.7.ML-%4777 7.3.M J A%4--.42+7

AACSB: Analytic
Difficulty: Basic
Section: ""$*

07. A project has earnings before interest and ta$es of A1-4/774 fi$ed costs of A.%47774 a
selling price of A%3 a unit4 and a sales 'uantity of 1/4777 units. All estiates are accurate
!ithin a plusDinus range of + percent. #epreciation is A1%4777. 8hat is the base case
variable cost per unit6
A. A%%.1/
". A%+.2-
C. A%-.73
#. A%-.%+
E. A%..12
L1/4777 EA%3 - vFM - A.%4777 - A1%4777 J A1-4/77I v J A%-.73

AACSB: Analytic
Difficulty: Basic
Section: ""$*

11-/0
01. At a production level of -4.77 units4 a project has total costs of A1724777. 1he variable
cost per unit is A11.%7. Assue the fir can increase production by 14777 units !ithout
increasing its fi$ed costs. 8hat !ill the total costs be if -4277 units are produced6
A. A17%4027
". A17-4/-7
C. A17/4-77
#. A1724777
E. A1114+/7
1otal cost J LA1724777 - EA11.%7 -4.77FM C E-4277 A11.%7F J A1114+/7

AACSB: Analytic
Section: ""$*
%o&ic: %otal costs

0%. A copany is considering a project !ith a cash break-even point of %%4/77 units. 1he
selling price is A%2 a unit4 the variable cost per unit is A1+4 and depreciation is A1-4777. 8hat
is the projected aount of fi$ed costs6
A. A+%.4777
B. A++34777
C. A+-%4777
#. A+-24777
E. A+.+4777
FCcash break-even J %%4/77 EA%2 - A1+F J A++34777

AACSB: Analytic
Difficulty: Basic
Section: ""$*
%o&ic: Cas/ brea(#e!en &oint

11-/2
0+. At the accounting break-even point4 &!iss =ountain :ear sells 1-4/77 ski asks at a
price of A17 each. At this level of production4 the depreciation is A.24777 and the variable cost
per unit is A-. 8hat is the aount of the fi$ed costs at this production level6
A. A%34/77
". A.%4-77
C. A/14+77
#. A204/77
E. A1-.4/77
Fi$ed costsaccounting break-even J L1-4/77 EA17 - A-FM - A.24777 J A%34/77

AACSB: Analytic
Difficulty: Basic
Section: ""$*

0-. 1he Coffee E$press has coputed its fi$ed costs to be A7.+- for every cup of coffee it
sells given annual sales of %1%4777 cups. 1he sales price is A1.-3 per cup !hile the variable
cost per cup is A7./+. ;o! any cups of coffee ust it sell to break-even on a cash basis6
A. 2+421-
". 3/4-07
C. 1%+4317
#. 1/04/+7
E. %1%4777
Pcash break-even J EA7.+- %1%4777FDEA1.-3 - A7./+F J 2+421- cups

AACSB: Analytic
Section: ""$*

11-/3
0.. 1he =etal &hop produces 1.2 illion etal fasteners a year for industrial use. At this level
of production4 its total fi$ed costs are A+024777 and its total costs are A.%%4777. 1he fir can
increase its production by . percent4 !ithout increasing either its total fi$ed costs or its
variable costs per unit. A custoer has ade a one-tie offer for an additional .74777 units at
a price per unit of A7.17. &hould the fir sell the additional units at the offered price6 8hy or
!hy not6
A. yesI 1he offered price is less than the arginal cost.
". yesI 1he offered price is e'ual to the arginal cost.
C. yesI 1he offered price is greater than the arginal cost.
#. noI 1he offered price is less than the arginal cost.
E. noI 1he offered price is greater than the arginal cost.
)ariable cost per unit J EA.%%4777 - A+024777FD142774777 J A7.72 per unit
1he arginal cost per unit !ill be A7.72 since the variable cost per unit !ill be unchanged.
1he order should be accepted since the offered price e$ceeds the arginal cost per unit.

AACSB: Analytic
Bloom's: Analysis
Section: ""$*

0/. 8e$ford <ndustrial &upply is considering a ne! project !ith estiated depreciation of
A%/47774 fi$ed costs of A0347774 and total sales of A1204777. 1he variable costs per unit are
estiated at A11.27. 8hat is the accounting break-even level of production6
A. -4201 units
". .4+++ units
C. .4-1. units
D. /43-3 units
E. 04%-2 units
Paccounting break-even J EA034777 C A%/4777FDLEA1204777DPF - A11.27M
P J /43-3 units

AACSB: Analytic
Bloom's: Analysis
Section: ""$*

11-07
00. 1he accounting break-even production 'uantity for a project is 114/-7 units. 1he fi$ed
costs are A%1/4777 and the contribution argin per unit is A%2. 1he fi$ed assets re'uired for
the project !ill be depreciated on straight-line basis to 5ero over the project*s .-year life.
8hat is the aount of fi$ed assets re'uired for this project6
A. A+%.43%7
B. A.-34/77
C. A0-24.77
#. A147274777
E. A14/%34/77
#epreciationaccounting break-even J E114/-7 A%2F - A%1/4777 J A17343%7
Fi$ed asset cost J A17343%7 . J A.-34/77

AACSB: Analytic
Bloom's: Analysis
Section: ""$*

02. A project has an accounting break-even point of 1.4+%3 units. 1he fi$ed costs are
A+2%4777 and the projected variable cost per unit is A%3.17. 1he project !ill re'uire A0274777
for fi$ed assets !hich !ill be depreciated straight-line to 5ero over the project*s /-year life.
8hat is the projected sales price per unit6
A. A-0./.
". A-2.12
C. A.-.7%
#. A././0
E. A/%..7
1.4+%3 J LA+2%4777 C EA0274777D/FMDEP - A%3.17FI P J A/%..7

AACSB: Analytic
Bloom's: Analysis
Section: ""$*

11-01
03. A proposed project has fi$ed costs of A342774 depreciation e$pense of A%40774 and a sales
'uantity of %4177 units. 1he total variable costs are A.4/70. 8hat is the contribution argin
per unit if the projected level of sales is the accounting break-even point6
A. A+.%2
". A-.70
C. A..3.
#. A/.1/
E. A0.11
Contribution argin J EA34277 C A%4077FD%4177 J A..3.

AACSB: Analytic
Difficulty: Basic
Section: ""$*

27. &pencer 1ools !ould like to offer a special product to its best custoers. ;o!ever4 the
fir !ants to liit its a$iu potential loss on this product to the fir*s initial investent
in the project. 1he fi$ed costs are estiated at A%147774 the depreciation e$pense is A1147774
and the contribution argin per unit is A1%..7. 8hat is the iniu nuber of units the fir
should pre-sell to ensure its potential loss does not e$ceed the desired level6
A. 14%%7 units
B. 14/27 units
C. %4%1. units
#. %4./7 units
E. %40.7 units
Cash break-even point J A%14777DA1%..7 J 14/27 units

AACSB: Analytic
Difficulty: Basic
Section: ""$.

11-0%
21. 1he =otor 8orks is considering an e$pansion project !ith estiated annual fi$ed costs of
A0147774 depreciation of A+24.774 variable costs per unit of A10.37 and an estiated sales
price of A%2 per unit. ;o! any units ust the fir sell to break-even on a cash basis6
A. /4.%1 units
B. 047+7 units
C. 04.17 units
#. 34//0 units
E. 1742-% units
Pcash break-even J A014777DEA%2 - A10.37F J 047+7

AACSB: Analytic
Difficulty: Basic
Section: ""$.

2%. A proposed project has a contribution argin per unit of A1+.174 fi$ed costs of A0-47774
depreciation of A1%4.774 variable costs per unit of A%%4 and a financial break-even point of
114+/7 units. 8hat is the operating cash flo! at this level of output6
A. A7
". A1%4.77
C. A/%4+73
D. A0-421/
E. A2/4.77
9CFfinancial break-even J E114+/7 A1+.17F - A0-4777 J A0-421/

AACSB: Analytic
Difficulty: Basic
Section: ""$.

11-0+
2+. Cantor*s has been busy analy5ing a ne! product. 1hus far4 anageent has deterined
that an 9CF of A%124%77 !ill result in a 5ero net present value for the project4 !hich is the
iniu re'uireent for project acceptance. 1he fi$ed costs are A+%34777 and the
contribution argin per unit is A%1/.-7. 1he copany feels that it can realistically capture %..
percent of the 1174777 unit arket for this product. 1he ta$ rate is +- percent and the re'uired
rate of return is 11 percent. &hould the copany develop the ne! product6 8hy or !hy not6
A. BesI 1he project*s e$pected <@@ e$ceeds the re'uired rate of return.
B. BesI 1he e$pected level of sales e$ceeds the re'uired level of production.
C. (oI 1he re'uired level of production e$ceeds the e$pected level of sales.
#. (oI 1he <@@ is less than the re'uired rate of return.
E. (oI 1he project !ill never payback on a discounted basis.
Financial break-even point J EA+%34777 C A%124%77FDA%1/.-7 J %4.%2./. units
E$pected sales J 1174777 7.7%. J %40.7 units.
1he project should be accepted because the e$pected level of sales is greater than the financial
break-even 'uantity.

AACSB: Analytic
Bloom's: Analysis
Section: ""$.

2-. 1ucker*s 1rucking is considering a project !ith a discounted payback period just e'ual to
the project*s life. 1he projections include a sales price of A+24 variable cost per unit of A12..74
and fi$ed costs of A+%4777. 1he operating cash flo! is A134077. 8hat is the break-even
'uantity6
A. /+1 units
". 14%11 units
C. 14/-1 units
#. %4+71 units
E. %4/.1 units
Pfinancial break-even J EA+%4777 C A134077FDEA+2 - A12..7F J %4/.1 units

AACSB: Analytic
Bloom's: Analysis
Section: ""$.

11-0-
2.. Bou are in charge of a project that has a degree of operating leverage of %./-. 8hat !ill
happen to the operating cash flo!s if the nuber of units you sell increase by / percent6
A. 1..2- percent decrease
". %.%0 percent decrease
C. no change
#. %.%0 percent increase
E. 1..2- percent increase
Percentage change in 9CF J %./- 7.7/ J 1..2- percent increase

AACSB: Analytic
Difficulty: Basic
Section: ""$0

2/. 1he accounting anager of :ate!ay <nns has noted that every tie the inn*s average
occupancy rate increases by % percent4 the operating cash flo! increases by ..+ percent. 8hat
is the degree of operating leverage if the contribution argin per unit is A-06
A. 7.+2
". 7..0
C. 1.0.
#. %.17
E. %./.
#9> J 7.7.+D7.7% J %./.

AACSB: Analytic
Difficulty: Basic
Section: ""$0

11-0.
20. &teele <nsulators is analy5ing a ne! type of insulation for interior !alls. =anageent has
copiled the follo!ing inforation to deterine !hether or not this ne! insulation should be
anufactured. 1he insulation project has an initial fi$ed asset re'uireent of A1.+ illion4
!hich !ould be depreciated straight-line to 5ero over the 1%-year life of the project. Projected
fi$ed costs are A0-%4777 and the anticipated annual operating cash flo! is A%-14777. 8hat is
the degree of operating leverage for this project6
A. +.02
". +.3%
C. -.72
#. -.%0
E. -..+
#egree of operating leverage J 1 C EA0-%4777DA%-14777F J -.72

AACSB: Analytic
Bloom's: Analysis
Section: ""$0

22. Bou are the anager of a project that has a %.2 degree of operating leverage and a re'uired
return of 1- percent. #ue to the current state of the econoy4 you e$pect sales to decrease by
0 percent ne$t year. 8hat change should you e$pect in the operating cash flo!s ne$t year
given your sales prediction6
A. 13./7 percent decrease
". 1/.7+ percent decrease
C. 1+.-/ percent decrease
#. ../7 percent decrease
E. %.0- percent decrease
Percentage change in 9CF J %.2 E-7.70F J -7.13/ J 13./7 percent decrease

AACSB: Analytic
Difficulty: Basic
Section: ""$0

11-0/
Essay Questions

23. 8hat is operating leverage and !hy is it iportant in the analysis of capital e$penditure
projects6
9perating leverage is the degree to !hich a project relies on its fi$ed costs. 1he ore capital
intensive a project4 the higher the project*s #9>. 1he higher the #9>4 the greater the
percentage change in the project*s operating cash flo!s relative to a one percent change in the
project*s sales 'uantity. As long as sales are increasing4 leverage !orks fine. ;o!ever4 !hen
sales decline4 leverage agnifies the related percentage decline in 9CF. 1hus4 capital
intensive firs are ore susceptible to forecasting risk.
Feedback: @efer to section 11..

AACSB: 4eflecti!e t/in(ing
Section: ""$0

37. 8hat is forecasting risk and !hy is it iportant to the analysis of capital e$penditure
projects6 8hat ethods can be used to reduce this risk6
Forecasting risk is the possibility that errors in projected cash flo!s !ill lead to incorrect
decisions. Projects are generally accepted !hen they have positive (P)s and rejected !hen
they have negative (P)s. <f the cash inflo!s of a project are overestiated4 the (P) !ill be
overstated potentially resulting in an incorrect acceptance of the project. 9n the other hand4 if
cash inflo!s are underestiated4 a good project ight be erroneously rejected. 1o offset soe
of this risk4 anagers should eploy sensitivity and scenario analysis as !ell as break-even
analysis to better understand the potential outcoes associated !ith the project.
Feedback: @efer to sections 11.14 11.%4 and 11.+

Bloom's: Synt/esis
Learning Obecti!e: and ""#*
Section: ""$"5 ""$) and ""$*
%o&ic: 6roect analysis

11-00
31. 8hat are the key features of the accounting4 cash4 and financial break-even points6

Feedback: @efer to sections 11.+ and 11.-

Bloom's: Knowledge
%o&ic: Brea(#e!en &oints

3%. Assue that a country e$periences a financial crisis that causes the nation*s financial
arkets to free5e in a anner that prevents a private fir fro raising capital fro any
source. E$plain ho! project analysis conducted by that fir !ould !ork in this situation.
1his situation is kno!n as hard rationing. <n this situation4 the fir cannot obtain financing
capital regardless of the rate of return offered. 1hus4 no e$ternally-financed projects !ould be
acceptable based on the noral ethods of project analysis.
Feedback: @efer to section 11./

Section: ""$1

11-02
3+. =r. "ear4 your boss4 !ill only agree to accept a project that4 as a iniu4 provides a rate
of return e'ual to the re'uireent he has set for the project. :iven this4 e$plain ho! you can
use break-even analysis to ascertain !hich projects !ill be acceptable to hi as you don*t
!ant to risk hearing hi gro!l if you !aste his tie presenting hi !ith a project that is
unacceptable.
1he financial break-even 'uantity is the sales 'uantity re'uired for a project to produce an
<@@ that e'uals the re'uired rate of return. 9nce this 'uantity has been established and the
values used in the coputations justified4 you !ould also need to justify that the re'uired
level of sales can be obtained.
Feedback: @efer to section 11.-

Section: ""$.


3-. Cool &hades4 <nc. EC&<F anufactures biotech sunglasses. 1he variable aterials cost is
A1./3 per unit4 and the variable labor cost is A+.7- per unit. &uppose the fir incurs fi$ed
costs of A0.74777 during a year in !hich total production is -.74777 units and the selling
price is A11..7 per unit. 8hat is the cash break-even point6
A. 0/4-.+ units
". 224/.% units
C. 117402+ units
#. 1%24370 units
E. 1-740/2 units
PCash "reak-even J A0.74777DEA11..7 - A1./3 - A+.7-F J 117402+ units

AACSB: Analytic
Difficulty: Basic
7OC 8: ""#"
Section: ""$.

11-03
3.. =ountain :ear can anufacture ountain clibing shoes for A1-.3. per pair in variable
ra! aterial costs and A12.-/ per paid in variable labor costs. 1he shoes sell for A1%0 per
pair. >ast year4 production !as 1074777 pairs and fi$ed costs !ere A2+74777. 8hat is the
iniu acceptable total revenue the copany should accept for a one-tie order for an
e$tra 174777 pairs6
A. A1-34.77
". A%204/77
C. A++-4177
#. A+274%11
E. A141/-4177
=arginal total revenue J 174777 EA1-.3. C A12.-/F J A++-4177

AACSB: Analytic
Difficulty: Basic
7OC 8: ""#)
Section: ""$*

11-27
3/. 8e are evaluating a project that costs A2.-47774 has a 1.-year life4 and has no salvage
value. Assue that depreciation is straight-line to 5ero over the life of the project. &ales are
projected at 1.-4777 units per year. Price per unit is A-14 variable cost per unit is A%74 and
fi$ed costs are A2/.417% per year. 1he ta$ rate is ++ percent4 and !e re'uire a 1- percent
return on this project. &uppose the projections given for price4 'uantity4 variable costs4 and
fi$ed costs are all accurate to !ithin 1- percent. 8hat is the !orst-case (P)6
A. A32-4/1+
". A14%/04772
C. A14-234.11
#. A1402%4-73
E. A1433+4207
9CF8orst J NLEA-1 7.2/F - EA%7 1.1-FML1.-4777 7.2/M - EA2/.417% 1.1-FON1 - 7.++F C
EA2.-4777D1.FE7.++F J A-/+4/.2.07

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
7OC 8: ""#1
Section: ""$)

11-21
30. A project has a unit price of A.47774 a variable cost per unit of A-47774 fi$ed costs of
A10477747774 and depreciation e$pense of A/43074777. 8hat is the accounting break-even
'uantity6
A. /4307 units
". 1747+7 units
C. 104777 units
#. %14-07 units
E. %+4307 units
PAccounting break-even J EA1047774777 C A/43074777FDEA.4777 - A-4777F J %+4307 units

AACSB: Analytic
Difficulty: Basic
7OC 8: ""#9
Section: ""$*

32. A project has the follo!ing estiated data: price J A0- per unitI variable costs J A+3.%%
per unitI fi$ed costs J A/4.77I re'uired return J 2 percentI initial investent J A24777I life J -
years. <gnore the effect of ta$es. 8hat is the degree of operating leverage at the financial
break-even level of output6
A. %.01/
B. +./31
C. -..%2
#. /.77+
E. 0.++0
#9> J 1 C E/4.77DA%4-1..+0F J +./31

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
7OC 8: ""#:
Section: ""$0

11-2%
33. Consider a project !ith the follo!ing data: accounting break-even 'uantity J %34777
unitsI cash break-even 'uantity J 1.43.7 unitsI life J 17 yearsI fi$ed costs J A%7+4777I
variable costs J A%- per unitI re'uired return J 1- percentI depreciation J straight line.
<gnoring the effect of ta$es4 !hat is the financial break-even 'uantity6
A. +240%+ units
". +34%71 units
C. +34-.2 units
#. +34/%- units
E. -743/3 units
1.43.7 J A%7+4777DEP - A%-FI P J A+/.0%0%0+
%34777 J EA%7+4777 C #FDEA+/.0%0%0+ - A%-FI # J A1//4737.37
<nitial investent J 17 A1//4737.37 J A14//74373
PF J EA%7+4777 C A+124-12.0.FDEA+/.0%0%0+ - A%-F J -743/3 units

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
7OC 8: ""#";
%o&ic: Brea(#e!en analysis

11-2+
177. At an output level of .74777 units4 you calculate that the degree of operating leverage is
1.2. 8hat !ill be the percentage change in operating cash flo! if the ne! output level is
.-4.77 units6
A. ..77 percent
". /.10 percent
C. 1/.%7 percent
#. 10.-+ percent
E. %7.77 percent
#9> J 1.2 J Percentage change in 9CFDL.-4.77 - .74777FD.74777MI Q9CF J 1/.%7 percent

AACSB: Analytic
Difficulty: Basic
7OC 8: ""#""
Section: ""$0

171. A proposed project has fi$ed costs of A+/4777 per year. 1he operating cash flo! at
124777 units is A/04777. 8hat !ill be the ne! degree of operating leverage if the nuber of
units sold rises to 124.776
A. 1.-/
B. 1..%
C. 1./0
#. %.72
E. %.1-
#9> J 1 C EA+/4777DA/04777F J 1..+0+1+
Percentage change in P J E124.77 - 124777FD124777 J %.0002 percent
At 124.77 units4 percentage change in 9CF J 1..+0+1+ .7%0002 J -.%07+ percent
(e! 9CF J A/04777 E1 C 7.7-%07+F J A/342/1
At 124.77 units4 #9> J 1 C EA+/4777DA/342/1F J 1..%

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
7OC 8: ""#"*
Section: ""$0

11-2-
17%. Consider a /-year project !ith the follo!ing inforation: initial fi$ed asset investent J
A-/74777I straight-line depreciation to 5ero over the /-year lifeI 5ero salvage valueI price J
A+-I variable costs J A13I fi$ed costs J A1224/77I 'uantity sold J 374.%2 unitsI ta$ rate J +%
percent. 8hat is the sensitivity of 9CF to changes in 'uantity sold6
A. A17.%7 per unit
". A11.1/ per unit
C. A11.+2 per unit
#. A1%.++ per unit
E. A1%..- per unit
9CF J LEA+- - A13F 374.%2 - 1224/77ML1 - 7.+%M C LEA-/74777D/F 7.+%M J A2134/07.3+
Gsing 314.%2 units: EBou can use any aount as the second level of 'uantity sold as the
sensitivity !ill be the sae.F
9CF J LEA+- - A13F 314.%2 - 1224/77ML1 - 7.+%M C LEA-/74777D/F 7.+%M J A2%34207.3+
&ensitivity J EA2%34207.3+ - A2134/07.3+FDE314.%2 - 374.%2F J A17.%7

AACSB: Analytic
Bloom's: Analysis
7OC 8: ""#"9
Section: Analysis

11-2.
17+. Bou are considering a ne! product launch. 1he project !ill cost A/+747774 have a .-year
life4 and have no salvage valueI depreciation is straight-line to 5ero. &ales are projected at 1/7
units per year4 price per unit !ill be A%-47774 variable cost per unit !ill be A1%47774 and fi$ed
costs !ill be A%2+4777 per year. 1he re'uired return is 11 percent and the relevant ta$ rate is
+- percent. "ased on your e$perience4 you think the unit sales4 variable cost4 and fi$ed cost
projections given here are probably accurate to !ithin 3 percent. 8hat is the !orst case
(P)6
A. A+4-104370
B. A%4/.-4%-1
C. A2224/12
#. A+417%41+-
E. A+4-.247%7
Gnit sales8orst J 1/7 E1 - 7.73F J 1-../ units
)ariable cost per unit8orst J A1%4777 E1 C 7.73F J A1+4727
Fi$ed costs8orst J A%2+4777 E1 C 7.73F J A+724-07
9CF8orst J LEA%-4777 - A1+4727FE1-../F - A+724-07ML1 - 7.+-M C 7.+-EA/+74777D.F J
A2224/12.1%

AACSB: Analytic
Bloom's: Analysis
7OC 8: ""#":
Section: ""$)

11-2/
17-. =c:illa :olf has decided to sell a ne! line of golf clubs. 1he clubs !ill sell for A.77 per
set and have a variable cost of A%77 per set. 1he copany spent A11+4777 for a arketing
study that deterined the copany !ill sell .24777 sets per year for 0 years. 1he arketing
study also deterined that the copany !ill lose sales of 1.4777 sets of its high-priced clubs.
1he high-priced clubs sell at A077 and have variable costs of A+77. 1he copany !ill also
increase sales of its cheap clubs by 34777 sets. 1he cheap clubs sell for A%77 and have variable
costs of A177 per set. 1he fi$ed costs each year !ill be A04..34777. 1he copany has also
spent A141++4777 on research and developent for the ne! clubs. 1he plant and e'uipent
re'uired !ill cost A%147774777 and !ill be depreciated on a straight-line basis. 1he ne! clubs
!ill also re'uire an increase in net !orking capital of A147.+4777 that !ill be returned at the
end of the project. 1he ta$ rate is -7 percent4 and the cost of capital is 2 percent. 8hat is the
<@@6
A. 0..1 percent
". 0.2% percent
C. 2.1+ percent
#. 2.-3 percent
E. 2./% percent
&ales J EA.77 .24777F C EA077 E-1.4777FF C A%77 34777F J A%74+774777
)ariable costs J E-A%77 .24777F C E-A+77 E-1.4777FF C E-A177 34777F J -A247774777
#epreciation J A%147774777D0 J A+47774777

11-20
AACSB: Analytic
Bloom's: Analysis
7OC 8: ""#);
Section: ""$)
%o&ic: 6roect 344

17.. ;ybrid cars are touted as a ?green? alternativeI ho!ever4 the financial aspects of hybrid
o!nership are not as clear. Consider a hybrid odel that has a list price of A.4-%7 Eincluding
ta$ conse'uencesF ore than a coparable car !ith a traditional gasoline engine.
Additionally4 the annual o!nership costs Eother than fuelF for the hybrid !ere e$pected to be
A-%7 ore than the traditional odel. 1he EPA ileage estiate is %+ pg for the traditional
odel and %. pg for the hybrid odel. Assue the appropriate interest rate is 17 percent4 all
cash flo!s occur at the end of the year4 you drive 1.4377 iles per year4 and keep either car
for / years. 8hat price per gallon !ould ake the decision to buy they hybrid !orth!hile6
A. A12.03
". A%1.-2
C. A%0.13
#. A%2.+%
E. A+7.17

AACSB: Analytic
Bloom's: 7!aluation
7OC 8: ""#)*
Section: ""$.

11-22
17/. <n an effort to capture the large jet arket4 ;iro Airplanes invested A1%./2 billion
developing its "-374 !hich is capable of carrying 277 passengers. 1he plane has a list price of
A%0. illion. <n discussing the plane4 ;iro Airplanes stated that the copany !ould break-
even !hen %-/ "-37s !ere sold. Assue the break-even sales figure given is the cash flo!
break-even. &uppose the sales of the "-37 last for only 3 years. ;o! any airplanes ust
;iro Airplanes sell per year to provide its shareholders a 13 percent rate of return on this
investent6
A. -0.10
". .%.-2
C. .3.73
#. /+.17
E. /2.-7
Cash flo! per plane J A1%4/2747774777D%-/ J A.14.--401.
C J Annual cash flo! necessary to deliver a 13 percent return

AACSB: Analytic
Bloom's: 7!aluation
7OC 8: ""#).
Section: ""$.

11-23

Chapter 11 - Project Analysis and Evaluation

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