12) In the 4th year of project M, expected revenues will be $4,750,000, variable costs will be
$4,000,000, depreciation expense $180,000, and fixed cash costs $570,000. Which of the
following is true?
A) Accounting income equals $0.00
B) Free cash flow equals $180,000
C) Free cash flow equals 0
D) Both A and B are true.
Topic: 13.3 Break-Even Analysis
Keywords: accounting break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
13) Jake’s Tree farm is evaluating a proposal to plant 5,000 ornamental trees at an initial cost of
$10,000. The trees will be sold in 5 years. What is the minimum after tax cash flow from selling
12%.
A) $12,000.00
B) $5,674.26
C) $17,623.42
D) $17,958.56
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
14) Miniature Molding is planning to introduce a valve for use in medical implants. Variable
costs per unit are $250. The maximum price MM could charge is $325. Fixed costs associated
with this product are $20,000,000. The worst case forecast calls for sales of 240,000 valves, the
best case for $290,400. Will MM reach accounting break-even in the worst case scenario?
A) Sales will fall short of break even by $8,666,667.
B) The product will exactly break even.
C) Sales will fall short of break even by $5,000,025.
D) Sales will exceed break even $58,000,000.
Topic: 13.3 Break-Even Analysis
Keywords: accounting break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
21
15) Miniature Molding is planning to introduce a valve for use in medical implants. Variable
costs per unit are $250. The maximum price MM could charge is $325. Fixed costs associated
with this product are $20,000,000. Depreciation expense of $2,500,000 are included in fixed
costs. The worst case forecast calls for sales of 240,000 valves, the best case for $290,400. Will
MM reach cash break-even in the worst case scenario?
A) Sales will fall short of cash break even by $8,666,667.
B) The product will exactly break even.
C) Sales will fall short of cash break even by $2,000,025.
D) Sales will exceed cash break even by $2,166,667.
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
16) Net present value break-even is reached:
A) after the time period when NPV finally turns from negative to positive.
B) at the discount rate that produces an NPV of $0.00.
C) at the level of sales over the life of the project that results in free cash flow of $0.000 for a
given period.
D) at the level of sales over the life of the project that results in an NPV of $0.00.
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
17) Garcia Developers will erect a small office building at a cost of $4,500,000. They have a
client who will lease the space for 5 years at a price that will produce free cash flows of
$150,000 per year. For approximately how much would they need to sell the building for at the
end of the 5th year to reach break-even NPV? Garcia uses a discount rate of 10% for projects of
this type.
A) $3,750,000
B) $5,755,936
C) $6,331,530
D) $6,964,683
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
22
18) DNATECH has developed a hair growth treatment at a cost of $10 million. They can license
the technology to another company for a period of 10 years. What is the minimum annual free
cash flow they could accept in order to reach break-even NPV on this product? Use a discount
rate of 8%.
A) $1,490,295
B) $1,639,324
C) $1,108,000
D) $1,000,000
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
19) Brookfield Heavy Equipment is considering a project that will produce after tax cash of
$40,000 per year for 5 years. The project will require an initial investment of $144,191. At what
discount rate will the project reach break-even NPV?
A) 8%
B) 10%
C) 12%
D) 11.11%
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
20) Miller River Light that manufactures the project will require an initial investment of
$350,000. Miller River uses a 12% discount rate for capital projects of this type. What level of
operating cash flows over a period of 5 years will cause the project to reach break-even NPV?
A) $70,000.00
B) $97,093.41
C) $92,329.12
D) $86,690.54
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
23
21) Project Zeta is expected to produce after-tax cash flows $30 million in year 1, $40 million in
year 2, and $50 million in year 3. If the company uses a 12% required rate of return, what is the
most it can invest in this project and break even with respect to NPV?
A) $69.03 million
B) $94.26 million
C) $1,11 million
D) $120 million
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
22) If Untel Inc. decides to manufacture a new generation of computer chips with a brief 2 year
product life cycle, it expects to sell 1 million units each year. Variable cost per unit will be $75,
fixed costs $5 million, and depreciation $3 million. The initial investment will be $22.91 million.
Untel uses a discount rate of 10%; its marginal tax rate is 40%. To reach break-even NPV,
UNTEL must sell the chips for at least ________ each.
A) $87
B) $105
C) $100
D) $1,000
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
23) Charlestown Marina’s forecasts indicate that if slip rentals equal $500,000, net operating
income will be $25,000 and if rentals equal $525,000, net operating income will be $37,500.
What is Charletown’s degree of operating leverage?
A) 2
B) 10
C) .05
D) .10
Topic: 13.3 Break-Even Analysis
Keywords: cash break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
24
24) Chevre Imported Cheese Inc. forecasts that if sales revenue for next year is $1,250,000, net
operating income will be $100,000 and if sales revenue is $1,000,000, net operating income will
be $80,000. Chevre’s degree of operating leverage is:
A) 2.
B) 10.
C) .5.
D) 1.
Topic: 13.3 Break-Even Analysis
Keywords: cash break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
25) Gardner Furniture Co. has calculated its degree of operating leverage as 3.5. If Gardner can
increase sales revenue by 5%, net operating income should increase by:
A) 15%.
B) 17.5%.
C) 1.43%.
D) 3.5%.
Topic: 13.3 Break-Even Analysis
Keywords: cash break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
26) Break-even NPV means that the expected rate of return on a project is equal to the required
rate of return.
Topic: 13.3 Break-Even Analysis
Keywords: NPV break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
27) Dudster company’s DOL is 2. If sales increase by 10%, NOI will increase by 5%.
Topic: 13.3 Break-Even Analysis
Keywords: degree of operating leverage (DOL)
Principles: Principle 2: There Is a Risk-Return Tradeoff
28) Accounting break-even means that the company is able to pay its interest expense and also
the dividends shareholders were expecting.
Topic: 13.3 Break-Even Analysis
Keywords: accounting break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
25
29) If the worst case scenario for a project results in an NPV of zero, the project should be
accepted.
Topic: 13.3 Break-Even Analysis
Keywords: human factors
Principles: Principle 2: There Is a Risk-Return Tradeoff
30) For a line of snowblowers sold by Arctic Equipment, fixed costs, including depreciation of
$1,000,000, total $2,400,000. The snowblowers sell for $800 each. Variable costs of a
snowblower are $500. Compute
a. accounting break-even.
b. cash break-even
Topic: 13.3 Break-Even Analysis
Keywords: accounting break-even
Principles: Principle 2: There Is a Risk-Return Tradeoff
26
31) Actual 2010 figures and forecasted 2011 figures are shown below for HEMOPath Labs
Actual 2011 Forecast 2011
Sales $6,000,000 $6,480,000
Total Variable
Costs 3,600,000 3,888,000
Total Fixed
Costs 2,000,000 2,000,000
NOI ? ?
DOL
Compute Compute HEMOPath’s degree of operating leverage (DOL).
Topic: 13.3 Break-Even Analysis
Keywords: degree of operating leverage (DOL)
Principles: Principle 2: There Is a Risk-Return Tradeoff
27