3) A consumer good company is developing a new brand of organic toothpaste. Above is the
sensitivity analysis for this product. If the best-case assumptions for Net Working Capital
are met, what will the net present value (NPV) of this project be?
A) $0.65 million
B) $1.7 million
C) $2 million
D) $3 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) A company planning to market a new model of motor scooter analyzes the efect of
changes in the selling price of the motor scooter, the number of units that will be sold, the
cost of making the motor scooter, the efect on Net Working Capital, and the cost of capital
for the project. They predict that the break-even point for sales price for the motor scooter
is $2,480. What does this mean?
A) If the motor scooter is sold for $2,480, then the project will make a proit.
B) If the motor scooter is sold for $2,480, then the net present value (NPV) for the product
will be zero.
C) The predicted selling price of the motor scooter is $2,480.
D) The maximum that the motor scooter can sell for and still make the project have a
positive net present value (NPV) is $2,480.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
41
Use the igure for the question(s) below.
5) The graph above shows the break-even analysis for the cost of making a certain good.
Based on this chart, which of the following is true?
A) The net present value (NPV) of the project increases with increased cost of goods sold.
B) The project should not be undertaken if the predicted cost of goods sold is less than
$110.
C) The net present value (NPV) of the project will be positive if the cost of goods sold is
greater than $110.
D) If the good costs $110 to make, the net present value (NPV) of the project will be zero.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
6) The EBIT break-even point can be calculated using which of the following formulas?
A) (Units Sold × Sale Price) – (Units Sold × Cost per unit) – SG&A – Depreciation = 0
B) (Units Sold × Sale Price) + (Units Sold × Cost per unit) – SG&A – Depreciation = 0
C) (Units Sold × Sale Price) – (Units Sold × Cost per unit) + SG&A + Depreciation = 0
D) (Units Sold × Sale Price) + (Units Sold × Cost per unit) + SG&A – Depreciation = 0
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
42
7) A maker of computer games expects to sell 475,000 games at a price of $48 per game.
These units cost $10 to produce. Selling, general, and administrative expenses are $1.0
million and depreciation is $280,000. What is the EBIT break-even point for the number of
games sold in this case?
A) $26,667
B) $26,316
C) $100,000
D) $33,684
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) A maker of kitchenware is planning on selling a new chef-quality kitchen knife. The
manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost
$80 each to produce. Selling, general, and administrative expenses are $500,000. The
machinery required to produce the knives cost $1.4 million, depreciated by straight-line
depreciation over ive years. The maker determines that the EBIT break-even point for
units sold and sale price is less than these estimates and that the EBIT break-even point for
costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go
ahead with manufacturing the knife. Was this the correct decision?
A) No, since the cost per unit should be greater than the EBIT break-even point for cost of
goods if the project is to have a positive EBIT.
B) Yes, since if the estimates for each parameter are correct , the EBIT will be positive.
C) Yes, since a positive EBIT ensures that the project will have a positive net present value
(NPV).
D) It cannot be determined whether the decision was correct, since other factors
contributing to the project’s net present value (NPV), such as the upfront investment, have
not been included in the analysis.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
43
9) The manufacturer of a brand of kitchen knives is investigating the likely efects that an
increase in the cost of the raw materials required to make these knives will have on the
cost of manufacturing the knives, the selling price of the knives, the number of knives that
will then be sold, and the project’s net present value (NPV). Which of the following best
describes what type of analysis the manager is performing?
A) scenario analysis
B) sensitivity analysis
C) break-even analysis
D) EBIT-break even analysis
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
10)
Year 0 Years 1 to
10
Revenues 2.90
– Manufacturing Expenses -0.5
– Marketing Expenses -0.15
– Depreciation -0.5
= EBIT 1.75
– Taxes (40%) -0.70
= Unlevered net income 1.05
+ Depreciation +0.5
– Additions to Net Working
Capital -0.4
– Capital Expenditures -6.00
= Free Cash Flow 1.15
Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should
expand into the sale of plastic ittings for home garden sprinkler systems. It has made the
above estimates of free cash lows resulting from such a decision. There are concerns of
the sensitivity of this project to changes in the cost of capital. For what cost of capital does
this project break-even?
A) 8%
B) 10%
C) 12%
D) 14%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
44
11)
Year 0
Years 1 to
10
Revenues 4.3
– Manufacturing Expenses -0.5
– Marketing Expenses -0.25
– Depreciation -0.5
= EBIT 3.05
– Taxes (40%) -1.22
= Unlevered net income 1.83
+ Depreciation +0.5
– Additions to Net Working
Capital -0.4
– Capital Expenditures -6
= Free Cash Flow 1.93
Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should
expand into the sale of plastic ittings for home garden sprinkler systems. It has made the
above estimates of free cash lows resulting from such a decision (all quantities in millions
of dollars). There are some concerns that estimates of manufacturing expenses may be low,
due to the rising cost of raw materials. What is the break-even point for manufacturing
expenses, if all other estimates are correct and the cost of capital is 9%?
A) $1.66 million
B) $1.83 million
C) $1.99 million
D) $2.32 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
45
12)
Year 0
Years 1 to
10
Revenues 4.4
– Manufacturing Expenses -0.4
– Marketing Expenses -0.15
– Depreciation -0.7
= EBIT 3.15
– Taxes (40%) -1.26
= Unlevered net income 1.89
+ Depreciation +0.7
– Additions to Net Working
Capital -0.4
– Capital Expenditures -7
= Free Cash Flow 2.19
Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should
expand into the sale of plastic ittings for home garden sprinkler systems. It has made the
above estimates of free cash lows resulting from such a decision (all quantities in millions
of dollars). It is thought that if marketing expenses are increased by 40%, then revenues
will rise. By how much will revenues have to rise for the net present value (NPV) of the
project to increase?
A) at least 0.8%
B) at least 1.4%
C) at least 1.5%
D) at least 2.0%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
46