Financial and Risk Analysis in Decision-Making

Final exam review Multiple Choice Questions 351. 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. 352. An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. A. Forecasting. B. Scenario. C. Sensitivity. D. Simulation. E. Break-even. 353. 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. 354. 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. 355. 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. 356. 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. 357. 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. 358. 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. 359. 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 360. 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. 361. 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. 362. At the cash break-even point, a multi-year project has a net present value that is equal to: A. Fixed costs. B. The initial cash outlay. C. The annual depreciation expense. D. The contribution margin. E. Zero. 363. Which of the following statements is NOT accurate regarding scenario analysis? A. A positive NPV for a project's worst case scenario means it is likely the project will in fact offer a positive return. B. The worst case scenario is used to identify the point at which a project's NPV becomes negative. C. The base case scenario generally represents an average estimate of NPV. D. If the NPV of the best case scenario is negative then it is likely unnecessary to create base and worst case scenarios. E. Scenario analysis is likely not as effective as sensitivity analysis for determining which variables have the greatest impact on projected NPVs. 364. Economic theory suggests that ___________ the likelihood of discovering a positive NPV project. A. the more competitive the market, the higher B. there is a positive relation between the competitiveness of a market and C. the competitiveness of a market has an indirect impact on D. the competitiveness of a market has an insignificant impact on E. competitive markets decrease 365. At the accounting break-even level of sales, the operating cash flow is equal to: A. The net present value. B. Fixed costs plus depreciation. C. The contribution margin times the quantity produced. D. Fixed costs plus depreciation divided by the contribution margin. E. The depreciation expense. 366. Which one of the following statements is true concerning operating leverage? A. The higher the degree of operating leverage, the greater the impact of forecasting risk. B. Firms with low operating leverage are said to be capital intensive. C. The degree of operating leverage is equal to [1 + (OCF/FC)]. D. The degree of operating leverage is equal to the percent change in quantity divided by the percent change in operating cash flow. E. Operating leverage increases as the output quantity rises. 367. Which of the following best describe the term scenario analysis. A. Investigation of what happens to NPV when only one variable is changed. B. The determination of what happens to NPV estimates when we ask what-if questions. C. The degree to which a firm or project relies on fixed costs. D. The change in costs that occurs when there is a small change in output. E. Taking into account the managerial options that are implicit in a project. 368. Which of the following best describe the term contingency planning. A. Investigation of what happens to NPV when only one variable is changed. B. The determination of what happens to NPV estimates when we ask what-if questions. C. The degree to which a firm or project relies on fixed costs. D. The change in costs that occurs when there is a small change in output. E. Taking into account the managerial options that are implicit in a project. 369. Which of the following best describe the term sensitivity analysis. A. Investigation of what happens to NPV when only one variable is changed. B. The determination of what happens to NPV estimates when we ask what-if questions. C. The degree to which a firm or project relies on fixed costs. D. The change in costs that occurs when there is a small change in output. E. Taking into account the managerial options that are implicit in a project. 370. Which of the following best describe the term marginal cost or incremental cost. A. Investigation of what happens to NPV when only one variable is changed. B. The determination of what happens to NPV estimates when we ask what-if questions. C. The degree to which a firm or project relies on fixed costs. D. The change in costs that occurs when there is a small change in output. E. Taking into account the managerial options that are implicit in a project. 371. Which of the following best describe the term operating leverage. A. Investigation of what happens to NPV when only one variable is changed. B. The determination of what happens to NPV estimates when we ask what-if questions. C. The degree to which a firm or project relies on fixed costs. D. The change in costs that occurs when there is a small change in output. E. Taking into account the managerial options that are implicit in a project. 372. Which one of the following statements is correct about a project with an estimated internal rate of return of negative 100 percent? A. The net present value of the cash inflows is exactly equal to the initial investment in the project. B. The estimated sales volume is equal to the cash break-even level of sales. C. The estimated sales volume is equal to the financial break-even level of sales. D. The payback period is exactly equal to the life of the project. E. The net present value of the project is equal to zero. 373. Which of the following is NOT a correct statement regarding break-even? A. Accounting break-even is the sales level that results in zero project net income. B. The cash break-even is the sales level that results in zero OCF. C. The financial break-even is the sales level that results in zero NPV. D. If there is depreciation the cash break-even will exceed the accounting break-even. E. Of the three break-evens, the financial break-even point is typically the highest. 374. Which one of the following statements is true concerning break-even points? A. The cash break-even quantity is equal to (FC + D)/(P - v). B. At the accounting break-even point, a project never pays back the initial investment. C. The financial break-even point is generally higher than the accounting break-even point. D. The IRR is just equal to the required return at the cash break-even point. E. The financial manager is more interested in the cash break-even point than in the financial or accounting break-even points. 375. The contribution margin must increase as: A. Both the sales price and variable cost per unit increase. B. The fixed cost per unit declines. C. The gap between the sales price and the variable cost per unit widens. D. Sales price per unit declines. E. The sales price minus the fixed cost per unit increases. 376. The difference between the unit sales price and the variable cost per unit is called: A. Operating leverage. B. The contribution margin. C. The gross profit. D. The net profit. E. The marginal revenue. 377. Which one of the following most likely represents the greatest forecasting risk? A. The replacement of current machinery with similar equipment. B. The reduction in production costs due to improved quality controls. C. The introduction of a new product that expands the types of goods offered. D. The introduction of an updated existing product. E. The sale of a used piece of equipment that is no longer needed. 378. Projected cash flow is typically defined to be: A. The best case expected cash flow. B. An average of the possible cash flows from the various scenarios. C. The largest possible cash flow. D. The cash flow that results in the lowest NPV but still allows the project to be accepted. E. The most likely cash flow. 379. Which one of the following statements concerning sensitivity analysis is correct? A. A project that has positive internal rates of return under the base, best, and worst case scenarios is a project that will produce a positive net present value under all three of those conditions. B. When measuring the sensitivity of the sales price, the estimated variable cost per unit used in the analysis should be changed in direct proportion to the change in the estimated level of sales. C. The most common approach to sensitivity analysis is to simultaneously vary sales in an upward direction as the estimated costs are varied in a downward direction to estimate the most optimistic outcome that can be reasonably expected. D. Sensitivity analysis on the sales quantity generally indicates that the net present value of a project is inversely related to the quantity of units produced and sold. E. The amount of forecast risk in any one variable can be ascertained using sensitivity analysis. 380. Conventional capital budgeting analysis will tend to understate the true NPV of a project if any of the following are present EXCEPT: A. Contingency plan options. B. The option to default. C. The option to expand. D. The option to abandon. E. The option to wait. 381. Which one of the following occurs at the accounting break-even level of sales? A. The operating cash flow is equal to zero. B. The net present value is positive. C. The project never pays back. D. The operating cash flow is equal to depreciation. E. The net present value is equal to zero. 382. At the accounting break-even point, ______________. A. Net present value is positive. B. Net income is positive. C. The project operating cash flow is equal to depreciation expense. D. A project's cash flow is equal to zero. E. The price per unit and variable cost per unit are equal. 383. A project with IRR = __________ just breaks even in a financial sense. A. 0% B. AAR C. the project's required return D. 100% E. -100% 384. The change in revenue that occurs when one more unit of output is sold is called the _____ revenue. A. Marginal. B. Average. C. Total. D. Fixed. E. Variable. 385. Which one of the following statements concerning scenario analysis is correct? A. Under the best-case scenario, total costs will be at their anticipated minimal level. B. Under the worst-case scenario, fixed costs will be at the minimal expected level. C. Under the base case scenario, sales will be at the highest level that is reasonably expected. D. Using scenario analysis, you can determine the forecast risk associated with sales. E. Scenario analysis concentrates on the changes in net income as variables move within reasonably expected ranges. 386. The analysis that uses the values that are believed to be the most likely to occur is called the: A. Base-case. B. Sensitivity case. C. Upper and lower bound case. D. Best-case. E. Risk-free case. 387. The contribution margin is defined as the difference between the: A. Unit sales price and the total cost per unit. B. Unit sales price and the variable cost per unit. C. Variable and fixed costs per unit. D. Pre-tax and after-tax costs per unit. E. Unit sales price and the pre-tax cost per unit. 388. Which one of the following statements related to variable costs is correct? A. Variable costs fluctuate over the long-term but remain constant over the short-term. B. An increase in the variable cost per unit increases the contribution margin. C. Variable costs change only when the quantity is varied by at least five percent. D. When production is halted, the variable costs of a project equal zero. E. The variable cost per unit is equal to the marginal cost at any level of output. 389. Martin Shores, Inc. is facing financial difficulties and has ceased production. Management realizes that the firm will still incur $15,000 of costs each month until such time as the firm is sold. This $15,000 represents the _____ costs of the firm's operations. A. Total. B. Fixed. C. Variable. D. Net. E. Contribution. 390. Simulation analysis is based on assigning a _____ and analyzing the results. A. Narrow range of values to a single variable. B. Narrow range of values to multiple variables simultaneously. C. Wide range of values to a single variable. D. Wide range of values to multiple variables simultaneously. E. Single value to each of the variables. 391. Which of the following does NOT correctly complete this sentence: A project that just breaks even in an accounting sense ___________________. A. Will lose money in a financial sense. B. Will result in zero taxes paid. C. Will not contribute to net income for the firm. D. Will have a payback period less than the life of the project. E. Will have operating cash flow equal to depreciation expense. 392. A project that just breaks even on an accounting basis _________________. A. Does not pay back. B. Will exactly pay back by the end of the project. C. Will pay back prior to the end of the project. D. Will break even on a financial basis as well. E. Will break even on a cash basis as well. 393. A project that just breaks even on a cash basis _________________. A. Does not pay back. B. Will exactly pay back by the end of the project. C. Will pay back prior to the end of the project. D. Has an IRR equal to 0 %. E. Has a profitability index of 2. 394. A project that just breaks even on a financial basis _______________. A. Does not pay back. B. Will exactly pay back by the end of the project. C. Will pay back prior to the end of the project. D. Has an IRR equal to 0 %. E. Has a profitability index of 2. 395. Westover Farms has developed a new strain of feed corn which is expected to produce more ears per acre. The company is now analyzing the value of actually planting and harvesting their first crops of this strain. The net present value (NPV) of the project is $740,000. This value was computed assuming that the project will last through five growing seasons. If Westover would include an option to abandon in the NPV computation, the NPV would: A. Not be affected. B. Would decrease over the life of the project. C. Would decrease, but only for the first year of the project. D. Increase, at least in the early years of the project. E. Increase, but only if the project continues for the entire five years. 396. Miller Brothers has determined that an operating cash flow of $24,300 will result in a zero net present value for a proposed project. The fixed costs of the project are $9,360 and the contribution margin is $4.30. The company feels that it will capture 18 percent of the 60,000 unit market for this product. Should the company develop the new product? Why or why not? A. Yes; because the financial break-even quantity is 7,828 units. B. Yes; because the financial break-even quantity is 8,001 units. C. Yes; because the anticipated market share exceeds the break-even quantity by 2,403 units. D. No; because the financial break-even quantity is 7,828 units E. No; because the financial break-even quantity is 8,001 units 397. The Colby Brothers have been busy analyzing a new product. They have determined that an operating cash flow of $18,200 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $11,650 and the contribution margin is $7.40. The company feels that they can realistically capture five percent of the 75,000 unit market for this product. Should the company develop the new product? Why or why not? A. Yes; The project has an expected internal rate of return of 100 percent. B. Yes; The expected level of sales exceeds the required number of units. C. Yes; The project is expected to sell 324 units more than the required number of units. D. No; The expected level of sales is less than the required level of 4,034 units. E. No; The annual sales would need to exceed 4,521 units to be acceptable. 398. Which one of the following could lower the risk of a project by lowering the degree of operating leverage? A. You could hire temporary workers from an employment agency rather than hiring part-time employees. B. You could use sub-contractors to produce sub-assemblies of your product rather than purchasing new equipment to do the work in-house. C. You could lease equipment on a long-term basis rather than buying the equipment. D. You could lower the projected selling price per unit. E. You could change the production method to one which relies more on fixed costs and less on variable costs than the current proposed method of production.