Corporate Finance, 12e (Ross)
1) An analysis of what happens to the estimate of net present value when only one input variable
is changed is called ________ analysis.
A) forecasting
B) scenario
C) sensitivity
D) simulation
E) break-even
2) An analysis of the relationship between the sales volume and accounting profitability is called
________ analysis.
A) forecasting
B) scenario
C) sensitivity
D) simulation
E) break-even
3) Variable costs:
A) change in direct relationship to the quantity of output produced.
B) are constant in the short-run regardless of the quantity of output produced.
C) are equal to the change in the fixed assets required to change the level of output.
D) are subtracted from fixed costs to compute the contribution margin.
E) are added to fixed costs on a per-unit basis to compute the contribution margin.
4) Fixed costs:
A) change as the quantity of output produced changes.
B) are constant over the short-run regardless of the quantity of output produced.
C) reflect the change in a variable when one more unit of output is produced.
D) are subtracted from sales to compute the contribution margin.
E) can be ignored in scenario analysis since they are constant over the life of a project.
5) The sales level that results in a project’s net income exactly equaling zero is called the
________ break-even.
A) operational
B) leveraged
C) accounting
D) cash
E) financial
6) The sales level that results in a project’s net present value exactly equaling zero is called the
________ break-even.
A) operational
B) leveraged
C) accounting
D) cash
E) financial
7) Conducting scenario analysis helps managers see the:
A) impact of an individual variable on the outcome of a project.
B) expected range of outcomes from a proposed project.
C) maximum range of outcomes that can occur over the course of a proposed project.
D) various decision points of a specific project.
E) consequences of changing a firm’s market share for a specific product.
8) Sensitivity analysis is primarily designed to determine the:
A) range of possible outcomes given the expected ranges for every variable.
B) degree to which the net present value reacts to changes in a single variable.
C) net present value given the best and the worst possible expected situations.
D) degree to which a project relies on financial leverage.
E) best mix of fixed and variable costs for each project.
9) As the degree of sensitivity of a project to a single variable rises, the:
A) lower the forecasting risk of the project.
B) smaller the range of possible outcomes given a pre-defined range of values for the input.
C) more attention management should place on accurately forecasting that variable.
D) lower the maximum potential value of the project.
E) lower the maximum potential loss of the project.
10) Sensitivity analysis is conducted by:
A) holding all variables at their base level and changing the required rate of return.
B) changing the value of two variables to determine their interdependency.
C) changing the value of a single variable and computing the resulting change in the project’s
NPV.
D) assigning either the best or the worst possible value to every variable and comparing the
results to the base case.
E) reviewing a project after implementation to determine how the actual results are comparing to
the predicted results.
11) To ascertain whether the inaccuracy of the variable cost estimate for a project will have
much effect on the final outcome of the project, you should probably conduct ________ analysis.
A) leverage
B) scenario
C) break-even
D) sensitivity
E) cash flow
12) Which one of the following is most likely a variable cost?
A) Office rent
B) Property taxes
C) Property insurance
D) Machinist wages
E) Management salaries
13) Which one of the following statements is correct?
A) At the accounting break-even level, the pretax profit is equal to the aftertax profit.
B) The contribution margin is equal to sales minus fixed costs.
C) Taxes are considered when computing the accounting break-even point but not the financial
break-even point.
D) The larger the contribution margin, the higher the financial break-even point.
E) The accounting break-even point is higher than the financial break-even point for the same
project.
14) All else constant, as the variable cost per unit for a project increases, the:
A) contribution margin decreases.
B) sensitivity to fixed costs decreases.
C) project’s net present value increases.
D) accounting break-even point decreases.
E) net profit increases.
15) The accounting profit break-even point is unaffected by a firm’s:
A) contribution margin.
B) depreciation method.
C) tax rate.
D) fixed costs.
E) variable cost per unit.
16) All else equal, the contribution margin must increase as:
A) both the sales price and variable cost per unit increase.
B) the fixed cost per unit declines.
C) the variable cost per unit declines.
D) sales price per unit declines.
E) the sales price minus the fixed cost per unit increases.
17) Which one of the following statements is correct?
A) An increase in the initial fixed assets required by a project will increase the accounting profit
break-even point.
B) If a firm needs to lower a project’s break-even points, it should lower the project’s revenue
estimate.
C) The NPV is zero at the accounting break-even point.
D) An increase in the tax rate will increase the accounting break-even point.
E) Depreciating project assets more rapidly will decrease the accounting break-even point.
18) Theoretically, the NPV is the most appropriate method to determine the acceptability of a
project. A false sense of security can overcome the decision-maker when the procedure is
applied properly but the positive NPV results are accepted blindly. Sensitivity and scenario
analysis aid in the process by:
A) providing assurance that the most appropriate discount rate is being applied.
B) ensuring all estimated values are accurate.
C) ensuring the NPV value was calculated correctly.
D) providing information on a number of potential outcomes.
E) guaranteeing the NPV will be achieved.
19) Sensitivity analysis:
A) provides the tradeoff between fixed and variable costs.
B) provides an estimate of the most profitable situation that is reasonably expected.
C) can be conducted on any input value used in the computation of a project’s NPV.
D) cannot evaluate a change in NPV related to a project’s initial investment.
E) should never be conducted if the base-case scenario results in a negative NPV.
20) Sensitivity analysis:
A) is more difficult to conduct than simulation analysis.
B) provides its user with the rate of return that corresponds to the project’s IRR.
C) is affected primarily by the interrelationships between project variables.
D) indicates which variable(s) need to be most closely monitored.
E) provides limited information and therefore is rarely used in practice.
21) Fixed production costs are:
A) directly related to labor costs.
B) measured as costs per unit of time.
C) ignored in project analysis.
D) dependent on the amount of goods or services produced.
E) irrelevant when conducting sensitivity analysis.
22) The contribution margin:
A) is dependent upon achieving a minimal level of output.
B) increases as the level of output decreases.
C) decreases as the level of output decreases.
D) has a major effect on the present value break-even point.
E) changes indirectly to a firm’s tax rate changes.
23) In the present value break-even, the EAC is used to:
A) determine the salvage value of the initial fixed asset investment.
B) allocate depreciation over the life of the project.
C) allocate the initial investment at its opportunity cost over the life of the project.
D) determine the contribution margin to fixed costs ratio.
E) allocate the opportunity and erosion costs over the life of the project.
24) The financial break-even point is superior to the accounting break-even point because the
financial break-even method:
A) is more complicated to calculate.
B) covers the economic opportunity costs of the investment.
C) is equivalent to sensitivity analysis.
D) covers the fixed costs of production, which the accounting break-even does not.
E) provides an economic profit over and above the required rate of return.
25) All else constant, the accounting break-even level of sales will decrease when the:
A) fixed costs increase.
B) depreciation expense decreases.
C) contribution margin decreases.
D) variable costs per unit increase.
E) selling price per unit decreases.
26) The point where a project produces a rate of return equal to the required return is known as
the:
A) point of zero profit.
B) internal break-even point.
C) accounting break-even point.
D) financial break-even point.
E) income break-even point.
27) Which one of the following statements is correct when a project is operating at its accounting
profit break-even point?
A) The project is just recovering the cost of the initial investment.
B) The aftertax profit is equal to the initial investment.
C) The project just pays back on a discounted basis.
D) The project’s IRR is equal to zero.
E) The contribution margin is equal to zero.
28) Break-even analysis:
A) based on accounting profits is preferable to the financial (or present value) break-even
method.
B) identifies the optimal maximum level of output for any given level of fixed assets.
C) ignores both taxes and interest when computing the financial break-even point.
D) provides a means of determining the minimal number of units that need to be sold to prevent
a financial loss.
E) identifies the optimal sales price for any new product.
29) The approach that further attempts to model real world uncertainty by analyzing projects the
way one might analyze gambling strategies is called:
A) the gambler’s approach.
B) the blackjack approach.
C) Monte Carlo simulation.
D) scenario analysis.
E) sensitivity analysis.
30) If you want the most detailed information possible about the potential outcome of a critical
project you should conduct:
A) operating analysis.
B) simulation analysis.
C) financial analysis.
D) decision tree analysis.
E) sensitivity analysis.
31) Simulation analysis is based on assigning a ________ and analyzing the results.
A) narrow range of values to a single variable
B) narrow range of values to multiple variables simultaneously
C) wide range of values to a single variable
D) wide range of values to multiple variables simultaneously
E) single value to each of the variables
32) An analysis of what happens to the estimate of a project’s net present value when you
examine a vast number of different likely economic situations is called ________ analysis.
A) forecasting
B) scenario
C) sensitivity
D) simulation
E) break-even
33) The type of analysis that is most dependent upon the use of a computer is ________ analysis.
A) scenario
B) financial break-even
C) sensitivity
D) accounting break-even
E) simulation
34) Monte Carlo simulation is:
A) the method of analysis most widely used by executives.
B) a very simple formula.
C) more complex than sensitivity or scenario analysis.
D) the oldest capital budgeting technique.
E) most commonly applied to small, short-term projects.
35) Management has decided to accept a new project but has yet to decide when the project
should commence. Which type of analysis would be most helpful at this time?
A) Expansion analysis
B) Timing option analysis
C) Scenario analysis
D) Sensitivity analysis
E) Simulation analysis
36) The investment timing decision relates to:
A) how long the cash flows last once a project is implemented.
B) the preferred starting date of a new project.
C) how frequently the cash flows of a project occur.
D) how many times a project can be expanded.
E) how long a project should operate before an abandonment decision can be implemented.
37) The option to wait:
A) increases in value as the project’s sensitivity to new technology increases.
B) is independent of the project’s discount rate.
C) is valueless when a project is profitable given immediate implementation.
D) decreases the net present value of a project.
E) may have value even if a new project currently has a negative net present value.
38) Last month, you introduced a new product to the market. Consumer demand has been
overwhelming and it appears that strong demand will exist over the long-term. Given this
situation, management should consider the option to:
A) suspend.
B) expand.
C) abandon.
D) contract.
E) withdraw.
39) Including the option to expand in your project analysis will tend to:
A) extend the duration of a project but not affect the project’s net present value.
B) increase the cash flows of a project but decrease the project’s net present value.
C) increase the net present value of a project.
D) decrease the net present value of a project.
E) have no effect on either a project’s cash flows or its net present value.
40) The potential decision to abandon a project has option value because:
A) abandonment can occur at one specific point in the future.
B) a project may be worth more dead than alive.
C) management is locked into a negative outcome.
D) future demand may exceed expectations.
E) the project may be worth more if its commencement is delayed.
41) In order to make a decision utilizing a decision tree, you must:
A) start at the most distant point in time and work backwards to Time 0.
B) begin at Time 0 and work towards the most distant point in time.
C) start at the top of the tree and work vertically downward to the very bottom.
D) start at the middle of the tree and work both upwards and downwards simultaneously.
E) concentrate only on the limbs with the highest probability of occurrence levels.
42) Utilizing a decision tree, the NPV used to make the decision to commence the testing for a
project is dependent on:
A) only the cash flows related to the actual test.
B) the path with the highest probability of occurrence.
C) all the project’s cash flows and probabilities over the project’s entire life.
D) only the cash flows and probabilities of the most successful path.
E) the cash flows and probabilities for the first year of the project’s life.
43) In a decision tree, caution should be used in the analysis because:
A) later stage decisions are probably riskier than earlier stages.
B) negative NPVs should never occur.
C) all real options must be included in the basic tree.
D) failure and its probability should be ignored because they are irrelevant.
E) early stage decisions are probably riskier than later stages.
44) Adept Co. is analyzing a proposed project with annual sales of 5,200 units, ± 6 percent;
variable costs per unit of $11, ± 3 percent; fixed costs of $17,500 per year, ± 3 percent; and a
sales price of $22 per unit, ± 2 percent. The annual depreciation expense is $4,200. What is the
annual sales revenue under the optimistic case scenario?
A) $105,385
B) $116,688
C) $127,474
D) $123,689
E) $109,408
45) A proposed project has estimated sales of 3,300 units per year, ± 4 percent; a sales price of
$23 a unit, ± 1 percent; variable costs per unit of $12.60, ± 2 percent; annual fixed costs of
$16,200; and annual depreciation of $3,100. What is the contribution margin under the expected
scenario?
A) $5.49
B) $4.55
C) $18.09
D) $10.40
E) $9.46
46) Angie’s expects annual sales of 2,400 units, ± 3 percent, of a new product at a price of $59 a
unit, ± 2 percent. The expected variable cost per unit is $27.20, ± 2 percent, annual fixed costs
are $32,500, and depreciation is $4,400 per year. What is the total annual expense per unit under
the pessimistic scenario? Ignore taxes.
A) $44.55
B) $41.70
C) $43.59
D) $40.02
E) $42.51
47) ABC Co. has compiled these estimates for a new 1-year project: Sales of 1,650 units, ± 5
percent; sales price of $17 a unit, ± 1 percent; variable costs per unit of $7.49, ± 3 percent; fixed
costs of $3,800, ± 1 percent; and depreciation of $2,200. The company bases its sensitivity
analysis on the expected case scenario. If the company conducts a sensitivity analysis at a sales
price of $16.25, what will be the earnings before interest and taxes?
A) $8,265
B) $8,454
C) $8,530
D) $8,709
E) $8,510
48) A project has estimated sales of 2,600 units at $15.40 per unit; variable costs per unit of
$6.79, ± 3 percent; annual fixed costs of $17,500, ± 3 percent; and depreciation of $2,850 per
year. The company bases its sensitivity analysis on the expected scenario. If a sensitivity analysis
is conducted using a variable cost of $7, what will be the total annual variable costs?
A) $18,746
B) $18,200
C) $16,625
D) $17,654
E) $21,185
49) A new project has estimated annual sales of 12,000 units, ± 3 percent; variable costs per unit
of $11.24, ± 2 percent; annual fixed costs of $38,290, ± 2 percent; and a sales price of $19.65 per
unit, ± 4 percent. The annual depreciation is $21,400 and the tax rate is 21 percent. What are the
annual earnings before interest and taxes under the optimistic scenario?
A) $52,694.40
B) $64,854.40
C) $57,516.89
D) $54,048.91
E) $61,940.08
50) The variable cost per unit for a proposed project is $8.48 and the annual fixed costs are
$27,400. These costs can vary by ± 5 percent. Annual depreciation is $13,290 and the tax rate is
21 percent. The sale price is $13.29 a unit, ± 2 percent. If the firm bases its sensitivity analysis
on the expected outcome, what will be the operating cash flow for a sensitivity analysis of 9,200
units?
A) $14,066.02
B) $16,103.98
C) $22,078.40
D) $11,554.50
E) $18,385.60
51) The projections for a new one-year project show sales of 8,500 units, ± 5 percent; variable
costs per unit of $28.62, ± 3 percent; and fixed costs of $164,000, ± 3 percent. Depreciation is
$62,000 and the tax rate is 23 percent. The sale price is $55 a unit, ± 2 percent. The company
bases its sensitivity analysis on the expected scenario. What is the operating cash flow for a
sensitivity analysis using total fixed costs of $170,000?
A) $62,406.67
B) $58,219.90
C) $61,311.07
D) $56,017.10
E) $52,048.80