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102. Firms that lack competitive advantages will:
103. How are sensitivity, scenario, and break-even analysis used to see the effect of an error
in forecasts on project profitability?
104. Why is managerial flexibility important in capital budgeting?
105. Briefly describe several factors that increase the difficulty in selecting appropriate capital
budgeting proposals.
106. Describe the process of sensitivity analysis and list some of the common variables that
you would expect to analyze.
107. Although sensitivity analysis can provide managers with keen insights, there can be
problems with the reliability of the NPV revisions. Discuss potential reasons for these problems.
108. Discuss the basic difference between an accounting break-even point analysis and an
economic break-even analysis. Which would you consider more reliable? Which would you
consider more common?
109. Define DOL, discuss the factors that affect DOL, and explain how DOL should be
interpreted.
110. Discuss decision trees, including how they can be useful and how they can be risky.
111. What are some of the factors that will commonly affect the abandonment value of a
project? When should abandonment be considered?
112. A silver mine can yield 10,000 ounces of silver at a variable cost of $8 per ounce. The
fixed costs of operating the mine are $10,000 per year. In half the years, silver can be sold for $12
per ounce; in the other years, silver can be sold for only $6 per ounce. Ignoring taxes, what is the
average cash flow you will receive from the mine if it is always kept in operation and the silver is
always sold in the year it is mined? What happens to the average cash flow from the mine if you
can shut down the mine in years of low silver prices?
113. Explain how a manager can use a decision tree to explain a proposed project to other
members of a management team. What benefits might be realized from this approach?
114. What are some of the practical problems of capital budgeting in large corporations?
115. A project has expected sales of 5,000 units, a selling price of $29 a unit, variable costs
equal to 60% of sales, fixed costs of $32,000, and depreciation of $9,500. Assume that total
revenue can increase by 12%, variable costs can decrease to 58% of sales, and fixed costs can
decrease by 5% in an optimistic situation. What would the pretax profits be, per year, if the
optimistic situation should occur? Show your computations.
116. A project has expected sales of 6,000 units, a selling price of $54 a unit, variable costs
equal to 62% of sales, fixed costs of $72,000, and depreciation of $13,500. Assume that total
revenues and fixed costs change by 5% in a pessimistic situation. What would the pretax profits
be, per year, if the pessimistic situation should occur? Show your computations.
