978-0132757089 Chapter 13 Part 2

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21) 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

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

22) 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

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

23) 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

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

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

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

25) What is the expected free cash flow for the best case scenario?

A) $414,400

B) $330,000

C) $394,500

D) $383,240

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

26) What is the expected free cash flow for the worst case scenario?

A) $153,973

B) $43,972

C) $84,910

D) $383,240

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

27) An appropriate tool to analyze the interaction of various value drivers for Destroya

Extermination Services would be

A) simulation

B) scenario analysis

C) sensitivity analysis

D) either A or B

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

28) The end result of a simulation analysis is:

A) a probability distribution of project cash flows.

B) a clear decision on whether or not a project should be accepted.

C) a probability distribution of possible NPV’s.

D) a list of value drivers and their probabilities.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

29) When using simulation to analyze a large capital project, the decision rule is:

A) There is no clear cut decision rule, but the probabilities will produce a more informed

decision.

B) Accept the project if the probability of a positive NPV is greater than 50%.

C) Reject the project if the probability of a negative NPV is greater than 5%

D) Reject the project if the probability of a negative NPV is greater than 16%

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

30) Cranston Plastic Packaging Solutions has run a simulation on a large project to produce eco-

friendly packaging for personal hygiene products. The mean NPV is an impressive $8,000,000,

but there is a 16% probability of a negative NPV and a 5% probability of an NPV worse than

($6,000,000).

A) Cranston should reject the project. It is too risky.

B) Cranston should accept the project. The odds are in their favor.

C) Cranston should explore options to reduce the likelihood of very unfavorable outcomes.

D) Cranston should change the probabilities used in the simulation to reduce the likelihood of a

negative NPV.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: simulation analysis

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

32) Using simulation provides the financial manager with a probability distribution of an

investment’s net present value or internal rate of return.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

33) In capital-budgeting decisions, simulation analysis gives a probability distribution only for

cash flows.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

34) Sensitivity analysis shows how the distribution of possible net present values is affected by a

change in one input variable.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: sensitivity analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

35) One advantage of simulation is that it can differentiate between unsystematic and systematic

risk.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

36) Briefly distinguish between sensitivity analysis, scenario analysis, and simulation.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

37) List at least four typical value drivers that could seriously impact the outcome of a project.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: value drivers

Principles: Principle 2: There Is a Risk-Return Tradeoff

38) Webster Footwear believes that a new line of foul weather footwear they are planning to

introduce this year will result in an NPV of $500,000 if the winter weather is exceptionally cold

and wet, $400,000 if weather is normal, and $200,000 if winter is relatively warm and dry. The

probability of a hard winter is 30%, an average winter is 50%, and a mild winter 20%. Compute

the project’s expected NPV.

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: expected value

Principles: Principle 2: There Is a Risk-Return Tradeoff

39) Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each. Variable

25%. If the number of croissants sold increases by 10%, and all other variables remain the same,

how much will free cash flow increase?

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

40) Angie’s Sub Shop expects to sell 200,000 subs next year at an average price of $5.00.

Variable cost of a sub is $3.00. Cash fixed costs are $85,000, depreciation $95,000 and the tax

rate is 25%. If the price increases to $5.50 and all other variables remain the same, how much

will free cash flow increase?

Topic: 13.2 Tools for Analyzing the Risk of Project Cash Flows

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk-Return Tradeoff

1) Which of the following costs is NOT covered in an accounting break-even analysis?

A) Shareholders expected rate of return

B) Variable production costs

C) Interest expense

D) Depreciation expense

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

2) The Oviedo Thespians are planning to present performances of their Florida Revue on 2

consecutive nights in January. It will cost them $5,000 per night for theater rental, event

insurance and professional musicians. The theater will also take 10% of gross ticket sales. How

many tickets must they sell at $10.00 per ticket to break even?

A) 1000 tickets

B) 1,112 tickets

C) 1,223 tickets

D) There is not enough information

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

3) Klaus Nicholas plans to sell Christmas trees from a vacant lot in downtown Springfield. The

trees will cost him $12 each. It will cost Klaus $1,500 to rent the lot from November 1 through

December 30. If Klaus sells the trees for $20 each, how many trees must he sell to break even?

Assume that he makes an initial, non-refundable purchase of 200 trees but can buy more trees in

any quantity after that for $12 each.

A) $1,500/($20-$12) = 188 trees with a very small profit on the last tree

B) $3,900/$20 = 195 trees

C) All 200 trees

D) The Christmas tree project can never break even.

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

4) Klaus Nicholas plans to sell Christmas trees from a vacant lot in downtown Springfield. The

trees will cost him $1200 per 100 tress. They can only be purchased in lots of 100. It will cost

Klaus $1,500 to rent the lot from November 1 through December 30. If Klaus sells the trees for

$20 each, how many trees must he sell to break even? Assume that he purchases makes an initial,

non-refundable purchase of 300 trees.

A) $1,500/($20-$12) = 188 trees with a very small profit on the last tree.

B) All 300 trees because he must purchase them in lots of 100.

C) At least 255 trees because all costs are fixed once the trees are purchased.

D) The Christmas tree project can never break even.

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

5) The Oviedo Thespians are planning to present performances of their Florida Revue on 2

consecutive nights in January. It will cost them $5,000 per night for theater rental, event

insurance and professional musicians. The theater will also take 10% of gross ticket sales. How

many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization?

A) 1000 tickets

B) 1,112 tickets

C) 1,223 tickets

D) There is not enough information

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

6) Accounting break-even analysis solves for the level of sales that will result in:

A) IRR=Cost of Capital.

B) net income = $0.00.

C) Free cash flow = $0.00.

D) NPV = $0.00.

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

7) Accounting break-even analysis uses:

A) free cash flows over the entire life of a project.

B) sales, variable costs and fixed costs over the entire life of a project.

C) sales, variable costs and fixed costs for a single period.

D) free cash flows for a single period.

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

8) February sales for Ted’s Variety Store equal $100,000, variable costs equal $60,000, fixed

costs, including depreciation of $20,000, total $60,000.

A) Teds’ Variety Store broke even with respect to net income.

B) Teds’ Variety Store broke even with respect to cash.

C) Ted’s Variety fell $20,000 short of cash break-even.

D) Teds’ Variety Store broke even with a $20,000 surplus.

Topic: 13.3 Break-Even Analysis

Keywords: cash break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

9) Variable cost for Light.com’s fluorescent tubes is $12.50, the tubes are sold over the internet to

businesses and organizations for $20.00 each. Fixed costs are $7,500,000. What is the break-

even quantity for the fluorescent tubes?

A) 600,000

B) 1,000,000

C) 375,000

D) 7,500,000

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

10) Variable cost for Light.com’s fluorescent tubes is $12.50, the tubes are sold over the internet

to businesses and organizations for $20.00 each. Fixed costs are $7,500,000. $500,000 in

depreciation expense is included in fixed costs. What is the cash break-even quantity for the

fluorescent tubes?

A) 933,333

B) 1,000,000

C) 375,000

D) 1,066,667

Topic: 13.3 Break-Even Analysis

Keywords: cash break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff

11) Excom Fiberoptics sell micro test tubes for biotechnology research in sets of 10,000 tubes.

Fixed costs associated with the project are $2,000,000, variable cost per set is $120. Excom

expects to sell 25,000 sets. What is the minimum price must it can charge and reach the

accounting break-even point?

A) $80

B) $120

C) $240

D) $200

Topic: 13.3 Break-Even Analysis

Keywords: accounting break-even

Principles: Principle 2: There Is a Risk-Return Tradeoff