Finance Chapter 10 2 The Level Sales Less Than That

59.

Calculate the NPV break-even level of sales for a project requiring an investment of $3 million and providing annual cash

flows equal to 15% of sales less $250,000. None of the initial investment is recoverable. Assume the project will generate

these cash flows for 10 years and the discount rate is 10%.

60.

If the level of sales is less than that calculated as the NPV break-even level, then the:

61.

One difference between an NPV break-even level of sales and an accounting break-even level of sales is the:

62.

A project that has zero economic value added:

63.

Which one of these projects would you always reject?

64.

Fixed costs including depreciation have increased at Leverage Inc., from $4 million to $5.3 million. Suppose that the

company now breaks even on an accounting basis with sales of $20 million. What must be the break-even variable cost as a

percentage of sales?

65.

Fixed costs:

66.

A firm with high operating leverage is expected to:

67.

If the firm’s degree of operating leverage is 4.5, what percentage change in sales will result in a 3% rise in profits?

68.

If the firm’s degree of operating leverage is 3.8, what percentage change in sales will result in a 13.8% fall in profits?

69.

If the proportion of fixed costs increases:

70.

What happens to a firm with high operating leverage when the overall level of sales is very high?

71.

For a firm with a DOL of 3.5, an increase in sales of 6% will:

72.

A firm with $800,000 of fixed costs including $200,000 of depreciation is expected to produce $225,000 in profits. What is

its DOL?

73.

If a firm’s DOL is 3.6 with a profit of $2,000,000 and depreciation of $500,000, what are its other fixed costs?

74.

A firm with a DOL of 4.5 generates pretax profits of $1 million. If depreciation expense is $600,000, what are its other fixed

costs?

75.

If a firm doubled its level of fixed costs but maintained its operating leverage, then one explanation may be that:

76.

A project offers a 30% probability of a payoff after one year of $2 million and a 70% chance of a payoff of $1 million. What

is the maximum you would invest in this project today if the discount rate is 10%?

77.

Decision trees:

78.

If MacCaugh’s pilot project is successful, it will be able to build a plant with an NPV of $2 million in 1 year’s time.

Otherwise the pilot investment will be valueless. If the discount rate is 20% and the chances of success are 50%, how much

can MacCaugh afford to spend on the pilot project?

79.

The branches on a decision tree

80.

The option for a firm to expand future production has most value when:

81.

The option to abandon a project inexpensively has particular value when:

82.

The option to switch between using oil or natural gas in a power station is:

83.

A firm acquires a patent to produce a new enhanced type of transcripter. What is the real option?

84.

A firm has a tract of timber. The future growth rate of the trees and the price of lumber are uncertain. The firm:

85.

Recognizing that it may be in managers’ best interests to be overly optimistic when proposing projects, how might firms

effectively control this impulse?

86.

One of the problems inherent in sensitivity analysis is that:

87.

Which of the following correctly describes sensitivity analysis?

88.

The accounting break-even point for a project is that level of sales where:

89.

The greater the ratio of variable costs to sales, the:

90.

When the level of fixed costs is decreased, the break-even level of revenues:

91.

A manufacturer contemplates a change in technology that would reduce fixed costs from $800,000 to $600,000, and reduce

depreciation expense from $125,000 to $100,000. However, the ratio of variable costs to sales would increase from 68% to

80%. What would be the change in the break-even level of revenues?

92.

In a graphic depiction of accounting break-even analysis, the greater the slope of the total cost line, the higher the:

93.

What is the economic break-even level of sales for a project costing $4,000,000 and generating annual cash flows equal to

0.30 × sales − $450,000? Assume the project will last 10 years and require a discount rate of 12%.

94.

The opportunity to abandon a project loses some of its value when:

95.

Which one of the following sets of conditions represents the more suitable investment?

96.

Positive NPV projects exist because:

97.

How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million, fixed costs of

$400,000, and a 60% ratio of variable costs to sales?

98.

The accounting break-even point for a firm is a function of its:

99.

What is the level of profits for a firm in which DOL = 5 and fixed costs including depreciation = $300,000?

100.

The DOL measures the percentage change in ______ given a percentage change in _____.

101.

The economic break-even point of a project can be found by:

102.

Firms that lack competitive advantages will:

Chapter 10 Test bank – Static Summary