Question 1

When firms do not have sufficient available financing to invest in the positive NPV projects they have identified, __________________ is/are said to exist.
A) Excess financing.
B) Contingency options.
C) Strategic options.
D) Managerial options.
E) Capital rationing.

Accepted Answer

Capital rationing occurs when firms do not have sufficient available financing to invest in the positive NPV (Net Present Value) projects they have identified. This situation forces companies to prioritize and choose among projects due to limited financial resources.

Question 2

An analysis of the relation between sales volume and various measures of profitability is called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E) Break-even analysis.

Accepted Answer

Break-even analysis is the correct term for analyzing the relationship between sales volume and profitability, as it determines the point at which revenue equals the costs associated with making and selling a product, thus indicating no profit or loss.

Question 3

Angelo knows that the selling price of a new product is going to be subject to considerable market pressures. He would like to know in advance how much leeway he has to lower the selling price without causing the project's rate of return to fall below the required rate. Angelo can determine this price range by using _____ analysis.
A) Sensitivity.
B) Scenario.
C) Simulation.
D) Financial break-even.
E) Cash break-even.

Accepted Answer

Sensitivity analysis helps in understanding how different values of an independent variable affect a particular dependent variable under a given set of assumptions. In this context, it would allow Angelo to see how changes in the selling price affect the project's rate of return, thus identifying the price range that maintains the rate of return above the required level.

Question 4

If a project manager wants to know which aspects of a project require the closest monitoring to ensure that the project remains profitable, the manager should use the technique known as _____ analysis.
A) Sensitivity.
B) Scenario.
C) Simulation.
D) Financial break-even.
E) Cash break-even.

Accepted Answer

Sensitivity analysis helps in identifying which variables have the most impact on the outcome of a project, allowing the project manager to focus on monitoring those key aspects to ensure profitability.

Question 5

Which of the following is NOT correct?
A) Forecasting risk is the possibility that errors in projected cash flows lead to incorrect decisions
B) Scenario analysis is the determination of what happens to NPV estimates if we ask what-if questions
C) Sensitivity analysis is an investigation of what happens to NPV when only one variable is changed
D) Simulation analysis is a combination of scenario and sensitivity analysis
E) Fixed costs are costs that change when the quantity of output changes during a particular time period

Accepted Answer

Fixed costs are costs that do not change with the quantity of output produced during a particular time period, contrary to what is stated in option E.

Question 6

Which one of the following is an example of a strategic option?
A) Opening a new store with a totally new retail design concept to determine if the plan will be well received by consumers.
B) Halting production for one week due to slower than expected sales.
C) Stopping a five-year project after six months due to a lack of consumer demand.
D) Deciding to only open 5 new retail outlets instead of the 10 outlets that were planned.
E) Deciding to change the manufacturing process half way through a project.

Accepted Answer

Opening a new store with a totally new retail design concept to determine if the plan will be well received by consumers is a strategic option because it involves making a long-term decision aimed at exploring new market opportunities or business models.

Question 7

Soft rationing is the:
A) Situation that exists when a firm has no financing available to fund any positive net present value projects.
B) Situation faced by a firm which must decide which one of two mutually exclusive projects it should accept.
C) Situation faced by a firm which has multiple net present value projects but has a limited supply of capital funding.
D) Situation where a firm has more available financing than that which is needed to fund all positive net present value projects.
E) Process of raising capital to fund projects while complying with pre-existing contractual agreements.

Accepted Answer

Soft rationing occurs when a firm has several projects with positive net present value (NPV) but faces limitations in available capital to fund all these projects. This situation forces the firm to prioritize and choose among the profitable projects due to the constraint on capital.

Question 8

The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:
A) Marginal spending.
B) Average spending.
C) Soft rationing.
D) Hard rationing.
E) Marginal rationing.

Accepted Answer

Soft rationing refers to the practice of allocating a fixed budget for capital expenditures to different business units within a company, often due to internal financial constraints.

Question 9

An analysis of what happens to the estimate of the net present value when you consider the best case and the worst case situations is called _____ analysis.
A) Forecasting.
B) Scenario.
C) Sensitivity.
D) Simulation.
E) Break-even.

Accepted Answer

Scenario analysis involves examining the potential outcomes of different scenarios, including best case and worst case situations, on the estimate of the net present value or other financial metrics.

Question 10

A financial manager reviewing a project is concerned about the level of forecasting risk in the project's estimated cash flows. The manager should use ___________ to identify the variable that presents the highest degree of forecasting risk.
A) Scenario analysis.
B) Simulation analysis.
C) Sensitivity analysis.
D) Break-even analysis.
E) Strategic options analysis.

Accepted Answer

Sensitivity analysis is used to determine how different values of an independent variable affect a particular dependent variable under a given set of assumptions. This method is particularly useful for assessing the forecasting risk by identifying which variables have the most significant impact on the project's outcomes, thereby highlighting the areas of greatest uncertainty or risk.

Question 11

An analysis of what happens to NPV estimates when we ask what-if questions is called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E) Break-even analysis.

Accepted Answer

Scenario analysis is a technique used to evaluate the impact of different assumptions on the NPV of a project. It involves creating multiple scenarios, each with different assumptions about the project's cash flows, and then calculating the NPV for each scenario. This allows the analyst to see how the NPV of the project is affected by changes in the assumptions.

Question 12

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.
A) Forecasting.
B) Scenario.
C) Sensitivity.
D) Simulation.
E) Break-even.

Accepted Answer

Simulation analysis combines scenario and sensitivity analyses by examining how changes in key variables affect the outcome of a model.

Question 13

A company is trying to decide which of two independent projects they should accept. The company is concerned that the estimates provided for the projects are overly optimistic. In this case, the firm should:
A) Ignore DOL, and select the highest NPV project.
B) Consider both DOL and NPV when making the decision.
C) Select the project with the highest accounting return.
D) Select the project with the shortest payback period.
E) Select the project with the lowest DOL.

Accepted Answer

Considering both Degree of Operating Leverage (DOL) and Net Present Value (NPV) is important. DOL helps assess the project's risk by showing how sensitive it is to changes in sales volume, while NPV provides a measure of the project's profitability.

Question 14

An analysis of what happens to NPV estimates when many variables take on many different values simultaneously is called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E) Break-even analysis.

Accepted Answer

Simulation analysis is the correct answer because it involves assessing the impact on the Net Present Value (NPV) when multiple variables change simultaneously, often using computer models to simulate different scenarios and their outcomes.

Question 15

The type of analysis that is most dependent upon the use of a computer is _____ analysis.
A) Scenario.
B) Break-even.
C) Sensitivity.
D) Degree of operating leverage.
E) Simulation.

Accepted Answer

Simulation analysis is most dependent on the use of computers because it involves creating complex models that mimic real-world processes, which often requires significant computational power to process the vast amounts of data and run the numerous iterations needed for accurate simulation.

Question 16

When firms do not have sufficient available financing to invest in all of the positive net present value projects they have identified, _____ is (are) said to exist.
A) excess financing
B) contingency options
C) strategic options
D) managerial options
E) capital rationing

Accepted Answer

Capital rationing occurs when a company does not have enough financial resources to support all projects with a positive net present value, leading to the need to prioritize and select among them.

Question 17

Taking into account the managerial options implicit in a project is called:
A) Managerial oversight.
B) Tactical planning.
C) Strategic planning.
D) Contingency planning.
E) Constrained capital budgeting analysis.

Accepted Answer

Contingency planning involves preparing for potential changes or unexpected events that could impact a project, which includes considering managerial options and responses.

Question 18

The president of your firm would like to offer special sale prices to your best customers under the following terms:

The prices will apply only to units purchased in excess of those normally purchased by the customer.

The units purchased must be paid for in cash at the time of sale.

The total quantity sold under these terms cannot exceed the excess capacity of the firm.

The net profit of the firm should not be affected either positively or negatively.

Given these conditions, the special sale price should be set equal to the:
A) Average variable cost.
B) Average total cost minus the marginal cost.
C) Sensitivity value of the variable cost.
D) Marginal cost.
E) Marginal cost minus the average fixed cost per unit.

Accepted Answer

The special sale price should be set equal to the marginal cost to ensure that the net profit of the firm is not affected either positively or negatively. This is because selling additional units at the marginal cost covers the extra cost of producing those units without impacting the overall profit margin.

Question 19

Genevieve has developed a computer software program that analyzes potential project outcomes. The software randomly assigns a value to each of the variables, such as sales quantity and variable cost per unit, and generates the resulting net present value for the project. This process is repeated hundreds of times with each variable always being assigned a random value within a given range of possible values. The software then produces a graph depicting the net present values that were generated. By using this software, Genevieve is conducting _____ analysis.
A) Sensitivity.
B) Scenario.
C) Simulation.
D) Financial break-even.
E) Cash break-even.

Accepted Answer

Genevieve is conducting simulation analysis, as the software repeatedly assigns random values to variables within a given range and generates outcomes (net present values), which is characteristic of simulation analysis.

Question 20

An analysis of what happens to NPV estimates when only one variable is changed is called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E) Break-even analysis.

Accepted Answer

Sensitivity analysis examines how the change in a single input variable affects the Net Present Value (NPV), allowing for the assessment of risk and uncertainty in financial models by isolating the impact of one variable at a time.

Quiz 11: Project Analysis and Evaluation

When firms do not have sufficient available financing to invest in the positive NPV projects they have identified, __________________ is/are said to exist.

An analysis of the relation between sales volume and various measures of profitability is called:

If a project manager wants to know which aspects of a project require the closest monitoring to ensure that the project remains profitable, the manager should use the technique known as _____ analysis.

Which of the following is NOT correct?

Which one of the following is an example of a strategic option?

Soft rationing is the:

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

An analysis of what happens to the estimate of the net present value when you consider the best case and the worst case situations is called _____ analysis.

A financial manager reviewing a project is concerned about the level of forecasting risk in the project's estimated cash flows. The manager should use ___________ to identify the variable that presents the highest degree of forecasting risk.

An analysis of what happens to NPV estimates when we ask what-if questions is called:

An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.

A company is trying to decide which of two independent projects they should accept. The company is concerned that the estimates provided for the projects are overly optimistic. In this case, the firm should:

An analysis of what happens to NPV estimates when many variables take on many different values simultaneously is called:

The type of analysis that is most dependent upon the use of a computer is _____ analysis.

When firms do not have sufficient available financing to invest in all of the positive net present value projects they have identified, _____ is (are) said to exist.

Taking into account the managerial options implicit in a project is called:

An analysis of what happens to NPV estimates when only one variable is changed is called: