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A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project _____
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What is a sunk cost?
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finance
chap 11
| Question | Answer |
|---|---|
| A positive NPV exists when the market value of a project exceeds its cost. Unfortunately, most of the time the market value of a project _____ | cannot be observed |
| What is a sunk cost? | A cost incurred in the past that is irrelevant to the capital investment decision process. |
| Which of the following is an opportunity cost in the context of a vacant building that a firm currently owns? | The potential rental income lost by using the empty building for a project |
| A potential problem with DCF analysis is that a project may appear to have a positive NPV because the estimated cash flows are . | inaccurate |
| Evans Corporation estimated that the cash flows last year from a particular project would be $40,000, but the actual cash flow turned out to be $37,500. Evans Corporation should _____. | not expect cash flow estimates to be exactly right every time |
| Which of the following are reasons why NPV is considered a superior capital budgeting technique? | NPV considers all the cash flows. NPV considers time value of money. |
| The possibility that errors in projected cash flows will lead to incorrect decisions is called , or estimation risk. | forecasting |
| Which of the following is an example of a sunk cost? | Research and development expense incurred in the past |
| If we conclude that a project has a negative NPV when the true NPV is positive, we lose a valuable opportunity. | True |
| A potential problem with DCF analysis is that a project may appear to have a positive NPV because the estimated cash flows are ______. Multiple choice question. precise | inaccurate |
| A legitimately positive NPV may be due to all of the following except _____. | a poll showing your customers prefer your product, when actual data shows that is not the case |
| To be considered good, projected cash flows should _____ actual cash flows | be close to |
| In a competitive market, positive NPV projects are: | uncommon |
| The possibility that errors in projected cash flows will lead to incorrect decisions is known as _____. | estimation risk forecasting risk |
| A firm will start generating positive accounting profits _____. | beyond the break-even sales point |
| What is the relationship between variable costs and output? | Total variable costs are directly related to the level of output. |
| Which of the following is an opportunity cost in the context of a vacant building that a firm currently owns? | The potential rental income lost by using the empty building for a project |
| A fixed cost is a cost that _____. | remains constant as the level of business activity changes |
| Which of the following is a legitimate reason for a project to have a positive NPV for Palmer Corporation? | Palmer can produce the product more cheaply than its competition. Palmer has a better product than its competition. Palmer has a better distribution channel than its competition. |
| Which of the following statements are true regarding fixed and variable costs? | Fixed costs per unit will decrease while variable costs per unit will stay constant if the level of output increases. Total fixed costs remain constant while total variable costs increase if the level of output increases. |
| When McDonald's decides to build a new restaurant at a particular location, which of the following competitors might also be tempted to locate new facilities in the same area? | Wendy's Burger King |
| Which of the following is a fixed cost for a garment manufacturing business? | Rent for the building |
| What is the purpose of accounting profit break-even analysis? | To determine the level of sales at which profits are equal to zero. |
| What will the shapes of total revenue and total costs be on a graph that depicts number of units on the x-axis and dollar amount (revenues and cost) on the y-axis? | Both the total revenue and total cost curves will slope upward. |
| Which of the following are true about variable costs? | Total variable costs increase as the total number of units produced increases. The variable cost per unit may remain constant as the number of units produced increases. |
| Which of the following are examples of fixed costs for a car repair shop performing oil changes and other repairs? | Monthly rent for the shop Salary for the shop manager Insurance for the shop |
| An accounting break-even point of 1,000 units means that ____. | when the firm sells 1,000 units, profits will be equal to zero |
| Total fixed costs remain constant while total variable costs (decrease/increase) if the level of output increases. | increase |
| Which of the following is a fixed cost for a tire manufacturing business? | Manager's salary of $98,000/year Building rent of $10,000/month |
| The contribution margin per unit will increase if ____. | the sales price per unit increases while the variable cost per unit decreases |
| In a graph with output on the x-axis and dollar amount (for costs and revenues) on the y-axis, what will be the shapes of variable and fixed costs? | Variable costs will be upward sloping while fixed costs will be parallel to the x-axis |
| Depreciation expense on a specific asset could be a fixed dollar amount or a variable dollar amount. | true |
| What is the relationship between variable costs and output? | Total variable costs are directly related to the level of output. |
| An accounting break-even point of 2,000 means the firm ____. | will start generating profits if it sells more than 2,000 units |
| Which of the following represents the accounting profit break-even point? | (Fixed costs + Depreciation)/Contribution margin |
| Corporate managers care about the break-even point because it indicates the level to which _____ can fall before a project will start losing money. | sales |
| Which of the following defines the contribution margin per unit? Ignore taxes. | Contribution Margin per Unit = Sales price - Variable cost per unit |
| Ultimately, we are more interested in cash flow than accounting income. | True |
| Which of the following are true about depreciation expense | It affects cash flows. It affects the accounting profit break-even point. It is a noncash expense. |
| The cost is equal to the quantity of output times the cost per unit of output. | variable |
| value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect. | Present |
| A firm will start generating profits when __ | the total number of units sold exceeds the accounting break-even point |
| Suppose Price per Unit is $6, variable cost per unit is $2, fixed costs are $400 and the depreciation allowance per year is $500. The relationship between operating cash flow (OCF) and sales volume (Q) can be expressed as: | OCF = −400 + 4*Q |
| Corporate managers care about the break-even point because it indicates the level _____. | to which sales can fall before a project will start losing money |
| The sales level that results in a zero operating cash flow is called the break-even. | cash |
| Rank each of the following in order from most important to least important as they pertain to project analysis: | cash flow/ accounting income |
| The break-even is the sales level that results in a zero NPV. | Financial |
| When a project breaks even on an accounting basis, the cash flow for that period will equal _____. | the depreciation allowance for that period |
| The break-even point adjusts for time value of money, whereas the break-even point does not. | Financial/ accounting |
| Which of the following equations correctly relates OCF to sales volume? | OCF = (P − v) × Q − FC |
| The degree to which a firm or project relies on fixed costs is called the leverage | Operatiing |
| The cash break-even is the sales level that results in a ______ operating cash flows. | zero |
| From a managerial perspective, highly uncertain projects can be dealt with by keeping the degree of operating leverage _____. | as low as possible |
| Financial break-even is the sales level that results in _____. | an NPV of zero |
| The _____ is the percentage change in operating cash flow relative to the percentage change in quantity sold | DOL |
| The financial break-even point differs from the accounting break-even point for which of the following reasons? | The financial break-even point adjusts for time value of money. |
| A situation in which a firm has positive NPV projects but cannot find the necessary financing is called capital . | Rationing |
| A firm with higher operating leverage will have ______ fixed costs relative to a firm with low operating leverage. | high |
| The Omega Division of Alpha Corporation has been allocated $4 million for capital spending but has identified $4.6 million in positive NPV projects. Omega's manager thinks he can convince the company to fund the additional $0.6 million dollars because Ome | sofe |
| A firm with higher operating leverage will have (low/high) fixed costs relative to a firm with low operating leverage. | high |
| When a business does hard rationing, the firm's DCF analysis breaks down. | true |
| Which of the following is the correct equation for the degree of operating leverage? | DOL = 1 + FC/OCF |
| Capital rationing exists when a company has identified positive NPV projects but can't find _____. | the necessary financing |
| The degree to which a firm or project relies on fixed costs is called the leverage. | operating |
| The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting is called rationing. | soft |
| The situation that occurs when a business cannot raise financing for a project under any circumstances is called rationing. | hard |
| The _____ is the percentage change in operating cash flow relative to the percentage change in quantity sold. | dol |
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agordon93