Question 1

Although sensitivity analysis can provide managers with keen insights, there can be problems with the reliability of the NPV revisions.Discuss potential reasons for these problems, and how these problems might be confronted.

Accepted Answer

The answer of Although sensitivity analysis can provide managers with...

Question 2

Calculate the accounting break-even point for the following firm: revenues of $700,000, $100,000 fixed costs, $75,000 depreciation, 60 percent variable costs, and a 35 percent tax rate.What happens to the break-even if a trade-off is made which increases fixed costs by $30,000 and decreases variable costs to 55 percent of sales?

Accepted Answer

The answer of Calculate the accounting break-even point for the...

Question 3

The accounting break-even point for a firm is a function of its:

Accepted Answer

The accounting break-even point is determined by the fixed costs and the profit on each sale, as it calculates the number of units that must be sold to cover all fixed costs, without considering taxes, interest, or other financial factors.

Question 4

Describe the process of sensitivity analysis and list some of the common variables that you would expect to analyze.

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The answer of Describe the process of sensitivity analysis and...

Question 5

The opportunity to alter production technology gives managers:

Accepted Answer

Altering production technology provides managers with flexibility to adapt to changing situations, such as changes in demand, new competitors, or advancements in technology. This can help them to stay competitive and relevant in the market. While changing production technology may eventually lead to increased cash flow, expanded production or product lines, these outcomes are not guaranteed and depend on a variety of factors.

Question 6

What are two of the factors that will commonly affect the abandonment value of a project? What criterion should determine abandonment?

Accepted Answer

The answer of What are two of the factors that...

Question 7

Harris Computer store has sales of $225,000, fixed costs of $40,000, and variable cost of $100,000.Calculate the degree of operating leverage (DOL) for this firm.

Accepted Answer

The answer of Harris Computer store has sales of $225,000,...

Question 8

Which of the following capital budgeting proposals is most likely to display a conflict of interests?

Accepted Answer

The proposal with the highest IRR and quickest payback may seem attractive from a financial perspective, but it may lead to potential conflicts of interest between short-term financial gains and long-term sustainability of the project. It is important to consider the potential long-term consequences of a project when making capital budgeting decisions. The other options do not necessarily indicate a conflict of interest.

Question 9

If a 20 percent reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

Accepted Answer

If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis suggests that the variable is not a critical factor. Therefore, de-emphasizing the variable would be a logical choice.

Question 10

Briefly describe several factors that increase the difficulty in selecting appropriate capital budgeting proposals.

Accepted Answer

The answer of Briefly describe several factors that increase the...

Question 11

A video rental store will cost $650,000 to open.Assuming annual sales of $1 million, variable costs of 35 percent, fixed costs of $300,000, depreciation of $100,000, and a tax rate of 35 percent, calculate the NPV of the project over a 10-year horizon (no inflation or salvage value assumed) with a 12 percent cost of capital.Conduct a sensitivity analysis by allowing investment, sales, variable costs, and fixed costs to vary by plus/minus 10 percent from their original estimates.Which variable appears to affect profitability the most? What does the sensitivity analysis suggest the investor do?

Accepted Answer

The answer of A video rental store will cost $650,000...

Question 12

Describe decision trees, including how they can be useful and how they can be risky.

Accepted Answer

The answer of Describe decision trees, including how they can...

Question 13

Selecting the lowest cost technology:

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The answer of Selecting the lowest cost technology:
...

Question 14

Define DOL, discuss what affects it and how to interpret it.

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The answer of Define DOL, discuss what affects it and...

Question 15

Seivewright Cobbler, Inc.can produce shoes that will be sold for $160 each.Non-depreciated fixed costs are $2,000 per year and variable costs are $120 per unit.If the project requires an initial investment of $6,000 and is expected to last for 5 years and the firm pays no taxes, what are the accounting and NPV break-even levels of sales?

Accepted Answer

The answer of Seivewright Cobbler, Inc.can produce shoes that will...

Question 16

Projects that can easily be modified in these ways are ____ valuable than those that don't provide such flexibility.

Accepted Answer

Projects that can easily be modified to meet changing requirements or circumstances are more valuable than those that do not provide such flexibility.

Question 17

Beryl expects her sales to increase by 20 percent next year.If this year's sales are $500,000 and the degree of operating leverage (DOL) is 1.4, what is the expected level of operating income (EBIT) for next year if this year's EBIT is $100,000?

Accepted Answer

The answer of Beryl expects her sales to increase by...

Question 18

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then:

Accepted Answer

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, it would be wise to conduct additional marketing analysis before proceeding. This will help to determine the most effective strategies to increase sales and maximize profits. Therefore, choice D would be the best option.

Question 19

If a firm tax rate is 40 percent what would your answer be? Now taxes are 40 percent of profits.Accounting break-even is unchanged, since taxes are zero when profits = 0.

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The answer of If a firm tax rate is 40...

Question 20

Discuss the basic difference between an accounting break-even point analysis and an NPV break-even analysis.Which would you consider more reliable? Which would you consider more common? Why?

Accepted Answer

The answer of Discuss the basic difference between an accounting...

Quiz 10: Project Analysis