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1. A capital budget shows a proposed list of investments.
2. The strategic planning portion of the capital budgeting process is essentially a "bottom-
up" process.
3. Competitive advantage is an important element of many successful capital budgeting
proposals.
4. While sensitivity analysis is forward-looking, scenario analysis attempts to reconstruct and
analyze the past.
5. The level of sales that produces a zero project NPV is referred to as the accounting break-
even point.
6. The NPV break-even level of sales will be higher than the accounting break-even level.
7. The degree of operating leverage (DOL) shows the relationship between sales and pretax
profits.
8. Operating leverage increases with fixed cost.
9. If a large proportion of a firm's costs is fixed, a shortfall in sales will have a magnified
effect on the firm's profits.
10. The greater the DOL, the greater the protection against operating losses during economic
downturns.
11. The clothing industry is considered to have a high degree of operating leverage.
12. The option to abandon a project becomes more valuable as the possible outcomes
become more varied.
13. Conflicts of interest between shareholders and managers may result in the sacrifice of
attractive capital budgeting proposals.
14. Sensitivity analysis takes into consideration the interrelationship of variables.
15. Scenario analysis allows managers to look at different and sometimes inconsistent
combinations of variables.
16. "What-if" questions ask what will happen to a project in various circumstances.
17. What-if analysis is not crucial to capital budgeting.
18. What-if analysis can help identify the inputs that are most worth refining before you
commit to a project.
19. The inputs that are most worth refining before you commit to a project are the ones that
have the greatest potential to alter project NPV.
20. Scenario analysis allows managers to look at different but consistent combinations of
interrelated variables.
21. A project that breaks even in accounting terms will surely have a negative NPV.
22. A project that simply breaks even on an accounting basis gives you your money back but
does not cover the opportunity cost of the capital tied up in the project.
23. Managers that accept projects that only break even on an accounting basis are helping
their shareholders.
24. What level of management is responsible for originating capital budgeting proposals?
25. The capital budget should be consistent with the firm's:
26. Which one of the following would
not
be included as a traditional capital budgeting
project?
27. Which one of the following industries has the highest level of operating leverage?
28. Which one of the following capital budgeting proposals is most apt to be associated with
a conflict of interests?
29. Analysis results indicate that a project's level of success is primarily dependent upon the
firm controlling the variable costs. What type of analysis was conducted?
30. Soft capital rationing may be beneficial to a firm if it:
31. The purpose of sensitivity analysis is to show:
32. Sensitivity analysis evaluates projects by:
33. What is the change in the NPV of a one-year project if fixed costs are increased from
$400 to $600, the firm is profitable, has a 35% tax rate, and employs a 12% cost of capital?
34. What happens to the NPV of a one-year project if fixed costs are increased from $400 to
$600, the firm is not profitable, has a 35% tax rate, and employs a 12% cost of capital?
35. Which one of the following appears to be a more likely result from using sensitivity
analysis?
36. If a 20% reduction in forecast sales would not extinguish a project's profitability, then
sensitivity analysis would suggest:
37. If sensitivity analysis concludes that the largest impact on profits would come from
changes in the sales level, then:
38. Which one of the following statements is correct concerning sensitivity analysis?
39. If sensitivity analysis indicates none of the individual variables will cause a negative NPV
under pessimistic conditions, then the:
40. Which one of the following techniques may be more appropriate to analyze projects with
interrelated variables?
41. Which one of the following descriptions is representative of scenario analysis?
42. Using a computer model to repeatedly vary the combination of project variables in order
to compare vast numbers of potential NPVs is called:
43. Assume a 5-year project has a base-case NPV of $213,000, a tax rate of 34%, and a cost
of capital of 14%. What will be the worst-case NPV if the annual cash flows are reduced in that
scenario by $35,000 for each of the 5 years?
44. Which one of the following variables would you suspect to be least significant in a
sensitivity analysis of a fast-food establishment?
45. A firm has fixed costs of $1.2 million and depreciation of $1 million. At a sales level of
$3.6 million, the variable costs of $2.304 million. What is the accounting break-even level of
sales?
