Question 1

What is the maximum percentage of variable costs to sales that a firm could have and still break even with $5 million in revenues,$1 million in fixed costs,and $500,000 of depreciation?
A) 30%
B) 70%
C) 80%
D) 90%

Accepted Answer

Accounting B / E = $5m = ($1m + 0.5m) / x; x = 0.30Variable costs to sales = 1 − 0.30 = 0.70, or 70%

Question 2

Which one of the following descriptions is representative of scenario analysis?
A) One variable at a time is allowed to change.
B) It isolates the unknowns that belong in the model.
C) Different combinations of variables are analyzed.
D) It represents the "top-down" approach.

Accepted Answer

Scenario analysis involves analyzing different combinations of variables to see how they might impact a particular outcome or decision. It is a bottom-up approach, as it considers multiple variables simultaneously rather than isolating them one at a time. Option A describes sensitivity analysis, option B refers to model building, and option D is not accurate as scenario analysis is not necessarily a top-down approach.

Question 3

If the level of sales is less than that calculated as the NPV break-even level,then the:
A) project will break even in accounting terms.
B) project's EVA will be greater than zero but less than the opportunity cost of capital.
C) project will have a negative EVA.
D) discount rate should be reduced.

Accepted Answer

When the level of sales is less than the NPV break-even level, it means that the project is not generating enough cash flows to cover the initial investment and the opportunity cost of capital. This results in a negative EVA (economic value added), which indicates that the project is not creating value for the shareholders. Therefore, choice C is the best option. The other choices are not applicable in this situation.

Question 4

Calculate the NPV break-even level of sales for a project requiring an investment of $3 million and providing annual cash flows equal to 15% of sales less $250,000.None of the initial investment is recoverable.Assume the project will generate these cash flows for 10 years and the discount rate is 10%.
A) $3,254,890
B) $3,504,890
C) $4,921,575
D) $1,686,667

Accepted Answer

$3m = [(Sales × 0.15) − $250,000]{(1 / 0.10) − [1 / 0.10(1.10)¹⁰]}; Sales = $4,921,575

Question 5

Assume a 5-year project has a base-case NPV of $213,000,a tax rate of 34%,and a cost of capital of 14%.What will be the worst-case NPV if the annual after-tax cash flows are reduced in that scenario by $35,000 for each of the 5 years?
A) −$92,842.17
B) −$120,157.83
C) $92,842.17
D) $120,157.83

Accepted Answer

NPV = $213,000 + (−$35,000 {(1 / 0.14) − [1 / 0.14(1.14⁵)]}) = $92,842.17

Question 6

A firm has fixed costs of $1.2 million and depreciation of $1 million.Variable costs are 64% of sales.What is the accounting break-even level of sales?
A) $5.23 million
B) $3.44 million
C) $6.11 million
D) $4.87 million

Accepted Answer

Profit margin = 1 − 0.64 = 0.36Accounting B / E = ($1.2m + 1m) / 0.36 = $6.11 million

Question 7

Which one of the following changes might turn a negative NPV project into a positive NPV project?
A) A decrease in the estimated annual sales
B) An increase in the discount rate
C) An increase in the initial investment
D) A decrease in the fixed costs

Accepted Answer

A decrease in the fixed costs will lower the overall costs of the project, which would increase the project's net cash flows and make the NPV positive. The other choices would have the opposite effect and worsen the NPV.

Question 8

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?
A) It raises the break-even level.
B) It reduces the break-even level.
C) It has no effect on the break-even level.
D) This cannot be determined without knowing the length of the investment horizon.

Accepted Answer

The accounting break-even level is determined by fixed costs, variable costs, and sales price, not by the cost of capital.

Question 9

If project sales exceed the accounting break-even point,but the project has a negative EVA,then the project has a:
A) positive NPV but earns less than the discount rate.
B) negative NPV but earns more than the discount rate.
C) net loss on the income statement.
D) net profit but negative NPV.

Accepted Answer

The answer of If project sales exceed the accounting break-even...

Question 10

Which one of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?
A) Sales
B) Depreciation
C) Labor cost
D) Food cost

Accepted Answer

Depreciation is a fixed cost that doesn't vary substantially with changes in sales or operational changes in a fast-food establishment. Therefore, it would be the least significant variable in a sensitivity analysis. On the other hand, changes in sales, labor cost, and food cost can significantly impact the profitability of the business.

Question 11

The accounting break-even level of revenues represents the point at which the project has:
A) zero pretax profit.
B) zero net present value.
C) covered all opportunity costs.
D) covered the fixed and variable costs but not the depreciation.

Accepted Answer

The accounting break-even level of revenues represents the point at which the project has generated enough revenue to cover all of its expenses, including fixed and variable costs, but has not yet generated a profit. Therefore, the pretax profit at this point would be zero.

Question 12

Calculate the ratio of variable costs to sales for a firm with a $3 million accounting break-even revenue point,$1.2 million fixed costs,and $450,000 depreciation.
A) 40%
B) 45%
C) 55%
D) 60%

Accepted Answer

Accounting B / E = $3m = ($1.2m + 0.45m) / x; x = 0.55Variable costs to sales = 1 − 0.55 = 0.45, or 45%

Question 13

The Corner Market has fixed costs of $1,600,depreciation of $1,200,a tax rate of 35%,and a cost of capital of 12%.Variable costs represent 67% of sales.What minimum level of sales must the market obtain to avoid a net loss on its income statement?
A) $8,484.85
B) $6,666.67
C) $7,033.33
D) $7,867.67

Accepted Answer

Accounting B / E = ($1,600 + 1,200) / (1 − 0.67) = $8,484.85

Question 14

A 6-year project has a zero NPV with sales of $5 million and a discount rate of 8%.The annual cash inflows are equal to 10% of sales minus $300,000.What was the initial investment in the project assuming that none of the investment is recoverable when the project ends?
A) $416,667
B) $924,576
C) $1,016,678
D) $2,311,450

Accepted Answer

Investment = [($5m × 0.10) − $300,000]{(1 / 0.08) − [1 / 0.08(1.08⁶)]} = $924,576

Question 15

A firm with 60% of sales going to variable costs,$1.5 million fixed costs,and $500,000 depreciation and sales of $3 million.How does the current level of sales compare to the accounting break-even sales level?
A) Current sales are $2 million below the break-even level.
B) Current sales are $333,333 below the break-even level.
C) Current sales are $800,000 below the break-even level.
D) Current sales exceed the break-even level by $360,000.

Accepted Answer

Accounting B / E = ($1.5m + 0.5m) / (1 − 0.60) = $5m; Current sales are $2 million below the break-even level.

Question 16

Weston's has variable costs that average 68% of sales.If fixed costs increase by $1,what will be the increase in the break-even level of revenues?
A) An increase of $0.68
B) An increase of $1.00
C) An increase of $1.471
D) An increase of $3.125

Accepted Answer

ΔBreak-even revenues = $1 / (1 − 0.68) = $3.125

Question 17

The accounting break-even level of sales represents the point where:
A) fixed costs are covered.
B) variable costs are covered.
C) fixed costs and variable costs are covered.
D) sales are equal to the sum of fixed costs, variable costs, and depreciation.

Accepted Answer

The accounting break-even point is where total sales equal the sum of fixed costs, variable costs, and depreciation, resulting in zero net income.

Question 18

Which statement is not correct?
A) project proposers tend to be overconfident about the likely success of the project.
B) project proposers often exaggerate the likely profitability in order to gain acceptance.
C) overconfidence and enthusiasm can result in increased effort.
D) most project proposals are based on very conservative forecasts.

Accepted Answer

The statement "most project proposals are based on very conservative forecasts" is not correct. In fact, project proposers often overestimate their chances of success and exaggerate the potential profitability of the project in order to gain acceptance.

Question 19

Break-even revenues on an accounting basis typically indicate a:
A) negative NPV.
B) positive NPV.
C) high degree of operating leverage.
D) downturn in the business cycle.

Accepted Answer

Break-even revenues on an accounting basis mean that total revenues equal total costs, resulting in zero profit. This typically indicates a negative NPV because it does not account for the time value of money or required return on investment.

Question 20

Calculate the accounting break-even level of sales assuming $865,000 of fixed costs,$400,000 depreciation expense,and a variable costs-to-sales ratio of 65%.
A) $2,769,230.77
B) $3,614,285.71
C) $4,237,769.23
D) $1,946.153.85

Accepted Answer

Accounting B / E = ($865,000 + 400,000) / (1 − 0.65) = $3,614,285.71

Quiz 10: Project Analysis

What is the maximum percentage of variable costs to sales that a firm could have and still break even with $5 million in revenues,$1 million in fixed costs,and $500,000 of depreciation?

Which one of the following descriptions is representative of scenario analysis?

If the level of sales is less than that calculated as the NPV break-even level,then the:

Assume a 5-year project has a base-case NPV of $213,000,a tax rate of 34%,and a cost of capital of 14%.What will be the worst-case NPV if the annual after-tax cash flows are reduced in that scenario by $35,000 for each of the 5 years?

A firm has fixed costs of $1.2 million and depreciation of $1 million.Variable costs are 64% of sales.What is the accounting break-even level of sales?

Which one of the following changes might turn a negative NPV project into a positive NPV project?

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

If project sales exceed the accounting break-even point,but the project has a negative EVA,then the project has a:

Which one of the following variables would you suspect to be least significant in a sensitivity analysis of a fast-food establishment?

The accounting break-even level of revenues represents the point at which the project has:

Calculate the ratio of variable costs to sales for a firm with a $3 million accounting break-even revenue point,$1.2 million fixed costs,and $450,000 depreciation.

The Corner Market has fixed costs of $1,600,depreciation of $1,200,a tax rate of 35%,and a cost of capital of 12%.Variable costs represent 67% of sales.What minimum level of sales must the market obtain to avoid a net loss on its income statement?

A 6-year project has a zero NPV with sales of $5 million and a discount rate of 8%.The annual cash inflows are equal to 10% of sales minus $300,000.What was the initial investment in the project assuming that none of the investment is recoverable when the project ends?

A firm with 60% of sales going to variable costs,$1.5 million fixed costs,and $500,000 depreciation and sales of $3 million.How does the current level of sales compare to the accounting break-even sales level?

Weston's has variable costs that average 68% of sales.If fixed costs increase by $1,what will be the increase in the break-even level of revenues?

The accounting break-even level of sales represents the point where:

Which statement is not correct?

Break-even revenues on an accounting basis typically indicate a:

Calculate the accounting break-even level of sales assuming $865,000 of fixed costs,$400,000 depreciation expense,and a variable costs-to-sales ratio of 65%.