Question 1

Lemminburg Plastics estimates a 60% probability that sales of pink flamingo lawn ornaments in the summer of 2011 will be 45,000 units,about the same as in 2010.They believe there is a 20% probability that they will go viral and potential sales would be 90,000.There is also a 20% probability that restrictive zoning ordinances will limit sales to 30,000 units.Expected unit sales of the pink flamingos are
A)55,000.
B)51,000.
C)67,500.
D)60,000.

Accepted Answer

To calculate the expected unit sales, we can multiply each possible outcome by its probability and then add them up.

Expected unit sales = (0.6 x 45,000) + (0.2 x 90,000) + (0.2 x 30,000) 
Expected unit sales = 27,000 + 18,000 + 6,000 
Expected unit sales = 51,000

Therefore, the best choice is B.

Question 2

When Quineboag Textile's sales revenue increased from $5.0 million to $5.25 million,net operation income increased from $500,000 to $575,000.What is Quineboag's degree of operating leverage (DOL)?
A).015
B).33
C)3.00
D)10

Accepted Answer

Degree of operating leverage (DOL) = percentage change in net operating income / percentage change in sales revenue

Percentage change in net operating income = ($575,000 - $500,000) / $500,000 = 0.15 or 15%
Percentage change in sales revenue = ($5,250,000 - $5,000,000) / $5,000,000 = 0.05 or 5%

DOL = 0.15 / 0.05 = 3.00

Therefore, the best choice is C) 3.00.

Question 3

Use the following information to answer the following question(s).
Destroya Extermination Services projects next year's sales of its new X-Ray termite inspection service at 5,000 inspections priced at $175 each.The variable costs per inspection are expected to be $87.50 Fixed cash costs are expected to be $90,000 and depreciation $110,000.The company's marginal tax rate is 34%.Destroya believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%.
-What is the expected free cash flow if the most likely estimates are used?
A)$156,750
B)$266,750
C)$237,500
D)$383,240

Accepted Answer

The answer of Use the following information to answer the...

Question 4

Which of the following is considered the major risk when analyzing projects in a multinational environment?
A)Currency fluctuations
B)Inflation
C)Political risk
D)Lack of available betas

Accepted Answer

Currency fluctuations are a major risk in a multinational environment as they can significantly affect the financial performance of a project. Inflation and lack of available betas can also affect a project, but they are not specific to a multinational environment. Political risk is also a concern, but may not be the major risk in all multinational projects.

Question 5

Boulangerie Bouffard expects to sell 1.25 million croissants next year for $1.50 each.Variable cost of a croissant is $0.80.Fixed costs are $150,000,depreciation $200,000 and the tax rate is 34%.If the bakery can increase the price of a croissant to $1.75 sales will fall by 50,000 croissants.All other things equal,operating cash flow will increase or decrease
A)$300,000 increase.
B)$148,500 increase.
C)$148,500 decrease.
D)$174,900 increase.

Accepted Answer

First, let's calculate the current operating cash flow:
Revenue = 1.25 million croissants * $1.50 per croissant = $1,875,000
Variable Cost = 1.25 million croissants * $0.80 per croissant = $1,000,000
Fixed Cost = $150,000 + $200,000 = $350,000
Depreciation = $200,000
EBIT = Revenue - Variable Cost - Fixed Cost - Depreciation = $325,000
Taxes = 0.34 * EBIT = $110,500
Operating Cash Flow = EBIT - Taxes = $214,500

Now, let's calculate the operating cash flow if the price increases to $1.75 and 50,000 croissants are not sold:
New Revenue = (1.25 million - 50,000) croissants * $1.75 per croissant = $1,818,750
New Variable Cost = (1.25 million - 50,000) croissants * $0.80 per croissant = $920,000
New Fixed Cost = $350,000
Depreciation = $200,000
New EBIT = New Revenue - New Variable Cost - New Fixed Cost - Depreciation = $348,750
Taxes = 0.34 * New EBIT = $118,395
New Operating Cash Flow = New EBIT - Taxes = $230,355

Therefore, the operating cash flow will increase by $15,855 ($230,355 - $214,500), which is closest to option D.

Question 6

When Charles River Publisher's sales revenue increased from $25 million to $27.5 million,net operating income increased from $3,750,000 to $3,937,500.What is Quineboag's degree of operating leverage (DOL)?
A).5
B)2
C)6.67
D).05

Accepted Answer

The answer of When Charles River Publisher's sales revenue increased...

Question 7

Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each.Variable cost of a croissant is $0.75.Fixed costs are $150,000,depreciation $200,000 and the tax rate is 25%.If the bakery can increase the price of a croissant to $1.50 and all other variables remain the same,free cash flow will increase by
A)$37,500.
B)$150,000.
C)$187,500.
D)$250,000.

Accepted Answer

First, let's calculate the current free cash flow:
Revenue = 1 million croissants x $1.25 = $1,250,000
Variable Costs = 1 million croissants x $0.75 = $750,000
Fixed Costs = $150,000 + $200,000 = $350,000
Earnings Before Taxes (EBT) = $1,250,000 - $750,000 - $350,000 = $150,000
Taxes = 0.25 x $150,000 = $37,500
Net Income = $150,000 - $37,500 = $112,500
Depreciation = $200,000
Free Cash Flow (FCF) = Net Income + Depreciation = $112,500 + $200,000 = $312,500

Now, let's calculate the new free cash flow if the price of a croissant is increased to $1.50:
Revenue = 1 million croissants x $1.50 = $1,500,000
Variable Costs = 1 million croissants x $0.75 = $750,000
Fixed Costs = $150,000 + $200,000 = $350,000
Earnings Before Taxes (EBT) = $1,500,000 - $750,000 - $350,000 = $400,000
Taxes = 0.25 x $400,000 = $100,000
Net Income = $400,000 - $100,000 = $300,000
Depreciation = $200,000
Free Cash Flow (FCF) = Net Income + Depreciation = $300,000 + $200,000 = $500,000

The increase in free cash flow is $500,000 - $312,500 = $187,500. Therefore, the correct answer is C) $187,500.

Question 8

Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate?
A)Sensitivity analysis
B)Simulation
C)Value driver analysis
D)Scenario analysis

Accepted Answer

Simulation involves creating thousands of iterations of a project's potential outcomes, resulting in a probability distribution for each possible outcome rather than a single dollar estimate. Sensitivity analysis, value driver analysis, and scenario analysis all focus on analyzing how changes in certain variables impact the project's overall outcome, but do not result in a probability distribution.

Question 9

Use the following information to answer the following question(s).
Orange Electronics projects sales of its new O-Phones for next year at 10,000 units priced at $150 each.The variable costs of an O-Phone are expected to be $75.Fixed cash costs are expected to be $150,000 and depreciation $100,000.The tax rate is 40%.Orange believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%.
-What is the expected net operating profit after tax (NOPAT)if the most likely estimates are used?
A)$493,500
B)$330,000
C)$300,000
D)$124,500

Accepted Answer

The expected NOPAT is calculated as follows: 
Revenue - Operating Expenses - Depreciation = Earnings Before Interest and Taxes (EBIT) 
EBIT * (1 - Tax Rate) = NOPAT

Using the most likely estimates: 
Revenue = $1,500,000 
Operating Expenses = $900,000 
Depreciation = $300,000 
EBIT = $300,000 
Tax Rate = 40%

$300,000 * (1 - 0.4) = $180,000 
Therefore, the expected NOPAT is $180,000 or C.

Question 10

Use the following information to answer the following question(s).
Orange Electronics projects sales of its new O-Phones for next year at 10,000 units priced at $150 each.The variable costs of an O-Phone are expected to be $75.Fixed cash costs are expected to be $150,000 and depreciation $100,000.The tax rate is 40%.Orange believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%.
-What is the expected net operating profit after tax (NOPAT)for the worst case scenario?
A)$300,000
B)$223,500
C)$174,000
D)$124,500

Accepted Answer

The answer of Use the following information to answer the...

Question 11

Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each.It believes that unit sales will grow between -5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2013 if the number of units sold increases by 5% per year and prices remain flat.
A)$2,880,000
B)$3,168,000
C)$3,333,960
D)$3,175,200

Accepted Answer

The answer of Enchanted Hearth expects to sell 1,200 wood...

Question 12

Economists at PHE Llc estimate a 20% probability of a recession next year,a 50% probability of an average economy,and a 30% probability of a rapid expansion.If there is a recession,the NPV of project O will be $20 million;if the economy is average,it will be $45 million and in case of a rapid expansion,it will be $75 million.What is the expected NPV of the project?
A)$57.5 million
B)$49 million
C)$46.67 million
D)$45 million

Accepted Answer

The expected NPV can be calculated by multiplying each outcome by its probability and summing these products: (0.20 * $20 million) + (0.50 * $45 million) + (0.30 * $75 million) = $4 million + $22.5 million + $22.5 million = $49 million.

Question 13

An appropriate tool to analyze the interaction of various value drivers for Orange Electronics would be
A)simulation.
B)sensitivity analysis.
C)scenario analysis.
D)either A or C

Accepted Answer

Both simulation and scenario analysis would be appropriate tools to analyze the interaction of various value drivers for Orange Electronics. Simulation would allow for the creation of a virtual model of the company and could be run multiple times to test various scenarios and outcomes. Scenario analysis would involve examining the potential impact of different external factors on the company's performance.

Question 14

Use the following information to answer the following question(s).
Orange Electronics projects sales of its new O-Phones for next year at 10,000 units priced at $150 each.The variable costs of an O-Phone are expected to be $75.Fixed cash costs are expected to be $150,000 and depreciation $100,000.The tax rate is 40%.Orange believes that any of its forecasts including fixed costs,but not depreciation or the tax rate which are known for certain,could be high or low by as much as 10%.
-What is the expected net operating profit after tax (NOPAT)for the best case scenario?
A)$493,500
B)$330,000
C)$394,500
D)$124,500

Accepted Answer

NOPAT is calculated as operating income (or earnings before interest and taxes - EBIT) minus taxes. The best case scenario would imply the highest NOPAT among the given options, which is $493,500.

Question 15

The form of risk analysis which examines the effect of various combinations of value drivers is known as
A)scenario analysis.
B)sensitivity analysis.
C)value driver analysis.
D)expected value analysis.

Accepted Answer

Scenario analysis is used to examine the effect of various combinations of value drivers by analyzing multiple possible future scenarios based on different assumptions about variables such as sales growth or interest rates. It is a useful tool for evaluating the impact of different factors on a company's financial performance and for identifying potential risks and opportunities. Sensitivity analysis focuses on examining the effects of changes in individual variables, while value driver analysis looks at the underlying factors that drive value creation in a business. Expected value analysis is a statistical technique for calculating the expected outcome of a particular action or decision based on probabilities and potential outcomes.

Question 16

Enchanted Hearth expects to sell 1,200 wood pellet stoves in 2011 at an average price of $2,400 each.It believes that unit sales will grow between -5% and +5% per year and prices will rise or fall by as much as 5% per year.Forecast sales revenue for 2013 if both price and the number of units sold increase by 5% per year.
A)$3,492,720
B)$3,500,658
C)$3,333,960
D)$3,175,200

Accepted Answer

To forecast sales revenue for 2013, we need to calculate the number of units sold and the average price in 2013.

The number of units sold in 2013 can be calculated as:
1,200 * 1.05 * 1.05 = 1,386 stoves

(We use 1.05 because the sales can increase by 5% each year for 2 years)

The average price in 2013 can be calculated as:
$2,400 * 1.05 * 1.05 = $2,772

(We use 1.05 because the prices can also increase by 5% each year for 2 years)

Therefore, the sales revenue in 2013 can be calculated as:
1,386 * $2,772 = $3,500,658

So, the best choice is B.

Question 17

Pederson Home Heating Inc.anticipates that cash flows from home heating fuel sales next year will be $800,000 if the winter is mild,$1,000,000 if winter is average,and $1,500,000 if winter is exceptionally cold.The probability of an average winter is 60%,while the probability of either a mild or an exceptionally cold winter is 20%.What is Pederson's expected cash flow from fuel sales next winter?
A)$1,060,000
B)$1,100,000
C)$1,000,000
D)$1,150,000

Accepted Answer

The expected cash flow is calculated by multiplying each cash flow by its probability and summing the results: (0.2 * $800,000) + (0.6 * $1,000,000) + (0.2 * $1,500,000) = $160,000 + $600,000 + $300,000 = $1,060,000.

Question 18

________ is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.
A)Project standing alone risk
B)Decision tree analysis
C)Scenario analysis
D)Pure play method

Accepted Answer

This risk analysis technique is called scenario analysis. It involves comparing the best-case and worst-case scenarios with the expected scenario to determine the range of potential outcomes and associated risks. The other options listed are different risk analysis techniques. The pure play method involves analyzing the risk of investing in a single industry or product. Decision tree analysis involves creating a visual representation of decision options and their potential outcomes. Project standing alone risk considers the risks associated with a specific project, independent of any other projects or factors.

Question 19

There is a 30% probability that an office building will be sold after 5 years for $30 million,a 50% probability that it will be sold for $20 million and a 20% probability that it will be sold for $10 million.What is the expected value of the office building in 5 years?
A)$20 million
B)$21 million
C)$30 million
D)$10 million

Accepted Answer

To find the expected value, we need to multiply each probability by its corresponding value and then add them up. 
Expected value = (0.3 x 30) + (0.5 x 20) + (0.2 x 10) = 9 + 10 + 2 = 21 million. Therefore, the best choice is (B).

Question 20

Scenario analysis is the form of risk analysis
A)that examines the relationship between total firm cash flows and the NPV of a particular project.
B)that examines the volatility of NPV.
C)that examines the impact of key variables such as sales or costs in various combinations.
D)that examines the impact of key variables such as sales or costs one at a time.

Accepted Answer

Scenario analysis examines the impact of key variables such as sales or costs in various combinations, allowing for a more comprehensive assessment of potential risks and uncertainties compared to examining the impact of variables one at a time.

Quiz 13: Risk Analysis and Project Evaluation

When Quineboag Textile's sales revenue increased from $5.0 million to $5.25 million,net operation income increased from $500,000 to $575,000.What is Quineboag's degree of operating leverage (DOL) ?

Which of the following is considered the major risk when analyzing projects in a multinational environment?

When Charles River Publisher's sales revenue increased from $25 million to $27.5 million,net operating income increased from $3,750,000 to $3,937,500.What is Quineboag's degree of operating leverage (DOL) ?

Which of the following results in a probability distribution for possible project outcomes rather than a dollar estimate?

An appropriate tool to analyze the interaction of various value drivers for Orange Electronics would be

The form of risk analysis which examines the effect of various combinations of value drivers is known as

________ is a risk analysis technique in which the best- and worst-case net present values are compared with the project's expected net present value.

There is a 30% probability that an office building will be sold after 5 years for $30 million,a 50% probability that it will be sold for $20 million and a 20% probability that it will be sold for $10 million.What is the expected value of the office building in 5 years?

Scenario analysis is the form of risk analysis