978-0133423822 Chapter 13 Part 2

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18) Boulangerie Boufard expects to sell 1 million croissants next year for $1.25 each.

Variable cost of a croissant is $0.75. Fixed costs are $150,000, depreciation $200,000 and

the tax rate is 25%. If the bakery can increase the price of a croissant to $1.50 and all other

variables remain the same, free cash low will increase by

A) $37,500.

B) $150,000.

C) $187,500.

D) $250,000.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: sensitivity analysis

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

19) Boulangerie Boufard expects to sell 1.25 million croissants next year for $1.50 each.

Variable cost of a croissant is $0.80. Fixed costs are $150,000, depreciation $200,000 and

the tax rate is 34%. If the bakery can increase the price of a croissant to $1.75 sales will

fall by 50,000 croissants. All other things equal, operating cash low will increase or

decrease

A) $300,000 increase.

B) $148,500 increase.

C) $148,500 decrease.

D) $174,900 increase.

Question Status: Revised

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: sensitivity analysis

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

Use the following information to answer the following question(s).

Orange Electronics projects sales of its new O-Phones for next year at 10,000 units priced

at $150 each. The variable costs of an O-Phone are expected to be $75. Fixed cash costs

are expected to be $150,000 and depreciation $100,000. The tax rate is 40%. Orange

believes that any of its forecasts including ixed costs, but not depreciation or the tax rate

which are known for certain, could be high or low by as much as 10%.

20) What is the expected net operating proit after tax (NOPAT) for the worst case

scenario?

A) $300,000

B) $223,500

C) $174,000

D) $124,500

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

21) What is the expected net operating proit after tax (NOPAT) if the most likely estimates

are used?

A) $493,500

B) $330,000

C) $300,000

D) $124,500

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

22) What is the expected net operating proit after tax (NOPAT) for the best case scenario?

A) $493,500

B) $330,000

C) $394,500

D) $124,500

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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 ixed costs, but not depreciation or the tax rate which are known

for certain, could be high or low by as much as 10%.

24) What is the expected free cash low if the most likely estimates are used?

A) $156,750

B) $266,750

C) $237,500

D) $383,240

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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

A) $414,400

B) $330,000

C) $394,500

D) $383,240

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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

A) $153,973

B) $43,972

C) $84,910

D) $383,240

Dif: 2

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

28) The end result of a simulation analysis is

A) a probability distribution of project cash lows.

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.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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%

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

31) Natick Nurseries has used scenario analysis to evaluate the purchase of a former dairy

to use for nursery stock. The best case scenario produced a very favorable NPV of

$4,000,000; the NPV of the most likely case was $2,000,000, but the worst case scenario

resulted in an NPV of $(3,000,000) which would bring the company close to bankruptcy.

Natick could improve its decision by

A) using sensitivity analysis.

B) using simulation analysis.

C) simply accepting the best case scenario and rejecting the other outcomes.

D) weighting the favorable scenarios more heavily to increase the expected NPV.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

32) Using simulation provides the inancial manager with a point estimate of an

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

Question Status: New question

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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

for cash lows.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

34) Sensitivity analysis shows how the distribution of possible net present values is afected

by a change in one input variable.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: sensitivity analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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

systematic risk.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

36) A company that was most concerned about the impact of price changes in raw

materials would use sensitivity analysis.

Question Status: New question

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

37) The expected NPV of a project is simply the NPV calculated using the most likely

estimates for costs and revenues.

Question Status: New question

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

38) Briely distinguish between sensitivity analysis, scenario analysis, and simulation.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: simulation analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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

project.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: value drivers

Principles: Principle 2: There Is a Risk–Return Tradeof

40) 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.

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: expected value

Principles: Principle 2: There Is a Risk–Return Tradeof

41) Boulangerie Boufard expects to sell 1 million croissants next year for $1.25 each.

Variable cost of a croissant is $0.75. Fixed costs are $150,000, depreciation $200,000 and

the tax rate is 25%. If the number of croissants sold increases by 10%, and all other

variables remain the same, how much will free cash low increase?

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

42) 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 ixed 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 low increase?

Question Status: Previous edition

Objective: 13.2 Use sensitivity, scenario and simulation analyses to investigate the determinants of

project cash lows.

Keywords: scenario analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

13.3 Break-Even Analysis

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

Question Status: Previous edition

Objective: 13.3 Use break-even analysis to evaluate project risk.

Keywords: break-even analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

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.

Question Status: Previous edition

Objective: 13.3 Use break-even analysis to evaluate project risk.

Keywords: break-even analysis

Principles: Principle 2: There Is a Risk–Return Tradeof

3) Betty Gilmore plans to sell berry pies at a local farmer’s market. The permit and space

rental will cost her $2,000 for the June through August season. The pies will sell for $7.00.

Ingredients and overhead average $4.00 per pie. She also has to pay ive percent of her

gross sales to the market’s organizers. How many pies will she need to sell to cover her

ixed costs?

A) 755 pies with a very small proit on the last pie.

B) 667 pies with a very small proit on the last pie.

C) 301 pies

D) She can never break even.

Question Status: New question

Objective: 13.3 Use break-even analysis to evaluate project risk.

Keywords: break-even analysis

Principles: Principle 2: There Is a Risk–Return Tradeof