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75) An investment has an initial cash outflow of $210,000 for fixed assets that will be
depreciated straight-line to zero over the 4-year life of the project. The sales price is $19.95 a
unit, annual fixed costs are $237,000, the variable costs per unit are $8.87, and the tax rate is 23
percent. At what annual sales quantity will the investment break even on an accounting basis?
A) 32,088 units
B) 29,889 units
C) 24,092 units
D) 30,135 units
E) 26,129 units
76) An investment has an initial cash outflow of $210,000 for fixed assets that will be
depreciated straight-line to zero over 4 years, which is the life of the project. The sales price is
set at $19.95 a unit, the annual fixed costs are $237,000, and the variable cost per unit is $8.87.
The tax rate is 22 percent and the discount rate is 11 percent. At what sales quantity per year will
the investment break even on a financial basis?
A) 29,787 units
B) 29,143 units
C) 27,886 units
D) 28,096 units
E) 30,308 units
77) Thompson's has determined that a new project has expected fixed costs of $132,378, a
contribution margin of $36.20, and a tax rate of 21 percent. The investment has an initial cost of
$548,000 that will be depreciated straight-line to zero over the 5-year life of the project. What is
the expected present value break-even point in units per year if the discount rate is 15 percent?
A) 8,569
B) 9,046
C) 9,331
D) 9,849
E) 9,615
78) Kurt's Interiors is considering a project with a sales price of $11, variable cost per unit of
$8.50, and annual fixed costs of $134,500. The tax rate is 23 percent and the discount rate is 14
percent. The project requires $224,000 of fixed assets that will be worthless at the end of the 4-
year project. What is the present value break-even point in units per year if the firm uses straight
line depreciation?
A) 88,808
B) 92,480
C) 93,057
D) 93,750
E) 87,046
79) A project has a contribution margin of $15, projected fixed costs of $120,000, variable costs
per unit of $12, annual depreciation of $61,000, and a projected present value break-even point
of 13,601.20 units. The tax rate is 21 percent, the discount rate is 12 percent, and the project life
is 3 years. What is the equivalent annual cost?
A) $81,110
B) $76,192
C) $84,207
D) $72,549
E) $76,667
80) The Can-Do Co. is analyzing a project with anticipated sales of 12,000 units, ± 4 percent;
variable costs per unit of $7, ± 6 percent; and annual fixed costs of $36,000, ± 6 percent. Annual
depreciation is $29,600 and the tax rate is 21 percent. The sale price is $14.99 a unit, ± 1 percent.
What is the operating cash flow under the optimistic scenario?
A) $63,876
B) $54,309
C) $56,208
D) $59,311
E) $64,499
81) A project has been assigned a discount rate of 12 percent. If the project starts immediately, it
will have an initial cost of $480 and cash inflows of $350 a year for three years. If the start is
delayed one year, the initial cost will rise to $520 and the cash flows will increase to $385 a year
for three years. What is the value of the option to wait?
A) $.70
B) $1.08
C) $1.67
D) $2.20
E) $.20
82) Marguerite is reviewing a project with projected sales of 1,400 units a year, a cash flow of
$39 a unit and project life of 3 years. The initial cost of the project is $94,000 and the discount
rate is 14 percent. She has the option to abandon the project after one year at which time she
feels she could sell the project for $63,000. At what quantity of annual sales should she be
willing to abandon the project after the first year?
A) 899 units
B) 981 units
C) 967 units
D) 1,199 units
E) 1,006 units
83) Wilson's Antiques is considering a project with an initial cost today of $10,000. The project
has a life of 2 years with cash inflows of $6,500 a year. Should the firm decide to wait one year
to commence this project, the initial cost will increase by 5 percent, and the cash inflows will
increase to $7,500 a year. What is the value of the option to wait at a discount rate of 10 percent?
A) $1,006.76
B) $1,235.54
C) $1,509.28
D) $1,606.76
E) $1,735.54
84) Brewster's is considering a project with a life of 5 years, an initial cost of $120,000, and a
discount rate of 12 percent. The firm expects to sell 2,100 units a year at a cash flow per unit of
$20. The firm will have the option to abandon this project after three years at which time it could
sell the project for $50,000. At what level of sales should the firm be willing to abandon this
project at the end of the third year?
A) 420 units
B) 1,041 units
C) 1,479 units
D) 1,618 units
E) 2,500 units
85) Brewster's is considering a project with a life of 5 years and an initial cost of $120,000. The
discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at a net cash
flow per unit of $20. The firm will have the option to abandon this project after three years at
which time it could sell the project for $50,000. The firm is interested in knowing how the
project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that
there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year. What is the net
present value of this project given these revised sales forecasts?
A) $23,617
B) $23,719
C) $25,002
D) $26,877
E) $28,745
86) Stage 2 of a decision tree shows that if a project is successful, the payoff will be $53,000
with a 2/3 chance of occurrence. There is also the 1/3 chance of a −$24,000 payoff. The cost of
getting to Stage 2 (1 year out) is $24,000. The cost of capital is 15 percent. What is the NPV of
the project at Stage 1?
A) −$349.16
B) −$231.88
C) $108.17
D) $133.33
E) $147.59
87) The Quick-Start Company has the following pattern of potential cash flows for a new
project.
If the company has a discount rate of 16 percent, what is the Time 1 net present value?
A) $50,807,953
B) $48,326,218
C) $52,009,107
D) $47,362,515
E) $45,887,056
88) The Quick-Start Company has the following pattern of potential cash flows for a new
project.
If the company has a discount rate of 17 percent, should it test the product? Why or why not?
A) Yes; NPV = −$48,632,106
B) Yes; NPV = $21,565,903
C) No; NPV = −$2,308,410
D) No; NPV = $36,515,028
E) Yes; NPV = $3,462,911
89) What is the benefit of scenario analysis if it does not produce a definitive accept or reject
decision for a proposed project?
90) Consider the following statement by a project analyst: "I analyzed my project using scenarios
for the optimistic, expected, and pessimistic cases. I computed break evens and conducted
sensitivity and simulation analysis. I computed NPV, IRR, the profitability index, and payback.
In the end, I have over a hundred different estimates and am more confused than ever. I would
have been better off just sticking with my first estimate and going by my gut instinct." Critique
this statement.
91) Explain the primary benefit of sensitivity analysis and explain why that benefit cannot be
realized by conducting scenario analysis.
92) The market value of an investment project should be viewed as the sum of the standard NPV
and the value of the managerial options. Identify three common project options available to
management, when each might be employed, and how each of those options would influence a
project's value.
93) Discuss some potential shortcomings of the standard decision tree analysis.
94) Other than quantifying the potential NPV of a project, what other benefits do decision trees
offer to managers?
