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43) Assume both the discount and tax rates are positive values. At the financial break-even point,
the:
A) payback period equals the project's life.
B) NPV is negative.
C) OCF is zero.
D) contribution margin per unit equals the fixed costs per unit.
E) IRR equals the required return.
44) By definition, which one of the following must equal zero at the cash break-even point?
A) Net present value
B) Internal rate of return
C) Contribution margin
D) Net income
E) Operating cash flow
45) Assume a project has a discounted payback that equals the project's life. The project's sales
quantity must be at which one of these break-even points?
A) Accounting
B) Leveraged
C) Marginal
D) Cash
E) Financial
46) Operating leverage is the degree of dependence a firm places on its:
A) variable costs.
B) fixed costs.
C) sales.
D) operating cash flows.
E) depreciation tax shield.
47) Which one of the following is the relationship between the percentage change in operating
cash flow and the percentage change in quantity sold?
A) Degree of sensitivity
B) Degree of operating leverage
C) Accounting break-even
D) Cash break-even
E) Contribution margin
48) You are considering a project and are concerned about the reliability of the cash flow
forecasts. To reduce any potentially harmful results from accepting this project, you should
consider:
A) lowering the degree of operating leverage.
B) lowering the contribution margin per unit.
C) increasing the initial cash outlay.
D) increasing the fixed costs per unit.
E) lowering the operating cash flow.
49) Which one of the following characteristics best describes a project that has a low degree of
operating leverage?
A) High variable costs relative to the fixed costs
B) Relatively high initial cash outlay
C) OCF that is highly sensitive to the sales quantity
D) High level of forecasting risk
E) High depreciation expense
50) Which one of the following will best reduce the risk of a project by lowering the degree of
operating leverage?
A) Hiring additional employees rather than using temporary outside contractors
B) Subcontracting portions of the project rather than purchasing new equipment to do all the
work in-house
C) Buying equipment rather than leasing it short-term
D) Lowering the projected selling price per unit
E) Changing the proposed labor-intensive production method to a more capital intensive method
51) The degree of operating leverage is equal to:
A) 1 + OCF/(FC + VC).
B) 1 + OCF/FC.
C) 1 + FC/OCF.
D) 1 + VC/OCF.
E) 1 − (FC + VC)/OCF.
52) Uptown Promotions has three divisions. As part of the planning process, the CFO requested
that each division submit its capital budgeting proposals for next year. These proposals represent
positive net present value projects that fall within the long-range plans of the firm. The requests
from the divisions are $4.2 million, $3.1 million, and $6.8 million. For the firm as a whole,
management has limited spending to $10 million for new projects next year even though the firm
could afford additional investments. This is an example of:
A) scenario analysis.
B) sensitivity analysis.
C) an operating leverage application.
D) soft rationing.
E) hard rationing.
53) Bell Weather Goods has several proposed independent projects that have positive NPVs.
However, the firm cannot initiate any of the projects due to a lack of financing. This situation is
referred to as:
A) financial rejection.
B) project rejection.
C) soft rationing.
D) marginal rationing.
E) capital rationing.
54) The procedure of allocating a fixed amount of funds for capital spending to each business
unit is called:
A) marginal spending.
B) capital preservation.
C) soft rationing.
D) hard rationing.
E) marginal rationing.
55) PC Enterprises wants to commence a new project but is unable to obtain the financing under
any circumstances. This firm is facing:
A) financial deferral.
B) financial allocation.
C) capital allocation.
D) marginal rationing.
E) hard rationing.
56) Brubaker & Goss has received requests for capital investment funds for next year from each
of its five divisions. All requests represent positive net present value projects. All projects are
independent. Senior management has decided to allocate the available funds based on the
profitability index of each project since the company has insufficient funds to fulfill all of the
requests. Management is following a practice known as:
A) scenario analysis.
B) sensitivity analysis.
C) leveraging.
D) hard rationing.
E) soft rationing.
57) The CFO of Edward's Food Distributors is continually receiving capital funding requests
from its division managers. These requests are seeking funding for positive net present value
projects. The CFO continues to deny all funding requests due to the financial situation of the
company. Apparently, the company is:
A) operating at the accounting break-even point.
B) operating at the financial break-even point.
C) facing hard rationing.
D) operating with zero leverage.
E) operating at maximum capacity.
58) New Town Instruments is analyzing a proposed project. The company expects to sell 1,600
units, ±3 percent. The expected variable cost per unit is $220 and the expected fixed costs are
$438,000. Cost estimates are considered accurate within a ±2 percent range. The depreciation
expense is $64,000. The sales price is estimated at $647 per unit, ±2 percent. What is the sales
revenue under the worst-case scenario?
A) $1,086,825
B) $896,201
C) $984,061
D) $1,014,496
E) $932,017
59) Precise Machinery is analyzing a proposed project that is expected to have sales of 2,450
units, ±8 percent. The expected variable cost per unit is $246 and the expected fixed costs are
$309,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation
expense is $106,000. The sales price is estimated at $599 per unit, ±2 percent. What is the
amount of the total costs per unit under the worst-case scenario?
A) $448.58
B) $404.16
C) $366.67
D) $338.23
E) $394.58
60) Precise Machinery is analyzing a proposed project. The company expects to sell 7,500 units,
±10 percent. The expected variable cost per unit is $314 and the expected fixed costs are
$647,000. Cost estimates are considered accurate within a ±4 percent range. The depreciation
expense is $187,000. The sales price is estimated at $849 per unit, give or take 2 percent. The tax
rate is 21 percent. The company is conducting a sensitivity analysis on the sales price using a
sales price estimate of $850. What is the operating cash flow based on this analysis?
A) $2,703,940
B) $2,293,089
C) $1,986,675
D) $2,354,874
E) $2,284,837
61) The Creamery is analyzing a project with expected sales of 5,700 units, ±5 percent. The
expected variable cost per unit is $168 and the expected fixed costs are $424,000. Cost estimates
are considered accurate within a ±3 percent range. The depreciation expense is $156,000. The
sales price is estimated at $339 per unit, ±5 percent. The tax rate is 21 percent. The company is
conducting a sensitivity analysis with fixed costs of $425,000. What is the OCF given this
analysis?
A) $416,511
B) $385,350
C) $467,023
D) $394,874
E) $421,300
62) HiLo Mfg. is analyzing a project with anticipated sales of 12,500 units, ±2 percent. The
variable cost per unit is $13, ± 2 percent, and the expected fixed costs are $237,000, ±1 percent.
The sales price is estimated at $69 a unit, ±3 percent. The depreciation expense is $68,000 and
the tax rate is 22 percent. What is the earnings before interest and taxes under the base-case
scenario?
A) $368,500
B) $421,000
C) $395,000
D) $414,900
E) $427,500
63) Assume a project has a sales quantity of 7,400 units, ±6 percent and a sales price of $59 a
unit, ±1 percent. The expected variable cost per unit is $13, ±3 percent, and the expected fixed
costs are $214,000, ±2 percent. The depreciation expense is $63,000 and the tax rate is 23
percent. What is the operating cash flow under the best-case scenario?
A) $136,759
B) $118,470
C) $145,705
D) $134,208
E) $124,220
64) Windows and More is reviewing a project with sales of 6,200 units, ±2 percent, at a sales
price of $29, ±1 percent, per unit. The expected variable cost per unit is $11, ±3 percent, and the
expected fixed costs are $87,000, ±1 percent. The depreciation expense is $68,000 and the tax
rate is 21 percent. What is the net income under the worst-case scenario?
A) −$38,578
B) −$39,713
C) $15,846
D) –$28,704
E) $4,696
65) Stellar Plastics is analyzing a proposed project with annual depreciation of $28,750 and a tax
rate of 23 percent. The company expects to sell 16,500 units, ±3 percent. The expected variable
cost per unit is $1.87, ±1 percent, and the expected fixed costs are $24,900, ±1 percent. The sales
price is estimated at $7.99 a unit, ±2 percent. What is the operating cash flow for a sensitivity
analysis using total fixed costs of $26,000?
A) $54,208
B) $64,347
C) $63,591
D) $62,408
E) $60,540
66) Your company is reviewing a project with estimated labor costs of $14.68 per unit, estimated
raw material costs of $43.18 a unit, and estimated fixed costs of $18,000 a month. Sales are
projected at 15,500 units, ±5 percent, over the one-year life of the project. Cost estimates are
accurate within a range of ±3 percent. What are the total variable costs for the best-case
scenario?
A) $869,925
B) $861,560
C) $913,421
D) $951,960
E) $891,960
67) A project has base-case earnings before interest and taxes of $36,408, fixed costs of $42,700,
a selling price of $24 a unit, and a sales quantity of 22,000 units. All estimates are accurate
within ±2 percent. Depreciation is $16,700. What is the base-case variable cost per unit?
A) $22.16
B) $23.84
C) $19.65
D) $22.23
E) $17.18
68) Consider a 5-year project with an initial fixed asset investment of $324,000, straight-line
depreciation to zero over the project's life, a zero salvage value, a selling price of $34, variable
costs of $17, fixed costs of $189,700, a sales quantity of 94,000 units, and a tax rate of 21
percent. What is the sensitivity of OCF to changes in the sales price?
A) $74,260 per $1 of sales
B) $61,600 per $1 of sales
C) $78,700 per $1 of sales
D) $59,470 per $1 of sales
E) $68,850 per $1 of sales
69) You are considering a new product launch. The project will have an initial cost for fixed
assets of $1,150,000, a three-year life, and no salvage value; depreciation is straight-line to zero.
Sales are projected at 230 units per year, price per unit will be $7,500, variable cost per unit will
be $3,900, and fixed costs will be $122,000 per year. The required return is 14.5 percent and the
relevant tax rate is 24 percent. Based on your experience, you think the unit sales and price are
accurate within a ±2 percent range while costs may vary by ±3 percent. What is the worst-case
NPV?
A) −$117,907
B) $156,446
C) −$78,517
D) $162,134
E) −$118,020
70) Shoe Supply has decided to produce a new line of shoes that will have a selling price of $68
and a variable cost of $27 per pair. The company spent $187,000 for a marketing study that
determined the company should sell 85,000 pairs of the new shoes each year for three years. The
marketing study also determined that the company will lose sales of 24,000 pairs of its high-
priced shoes that sell for $129 and have variable costs of $63 a pair. The company will also
increase sales of its inexpensive shoes by 19,000 pairs. The inexpensive shoes sell for $39 and
have variable costs of $15 per pair. The fixed costs each year will be $1.42 million. The
company has also spent $1.29 million on research and development for the new shoes. The initial
fixed asset requirement is $4.2 million and will be depreciated on a straight-line basis over the
life of the project. The new shoes will also require an increase in net working capital of $447,000
that will be returned at the end of the project. Sales and cost projections have a ±2 percent range.
The tax rate is 21 percent, and the cost of capital is 12 percent. What is the NPV for the new line
of shoes assuming the base-case scenario?
A) −$1,844,788
B) −$806,318
C) $102,311
D) $687,415
E) $520,909
71) A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no
salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are
projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and
fixed costs are $842,900 per year. The tax rate is 23 percent and the required return is 11.5
percent. Suppose the projections given for price and quantity can vary by ±4 percent while
variable and fixed cost estimates are accurate to within ±2 percent. What is the best-case NPV?
A) $4,613
B) −$67,008
C) $127,511
D) $82,409
E) −$132,194
72) A project has expected sales of 54,000 units, ±5 percent, variable cost per unit of $87, ±2
percent, fixed costs of $287,000, ±1 percent, and a sales price per unit of $219, ±2 percent. The
depreciation expense is $47,000 and the tax rate is 23 percent. What is the contribution margin
per unit for a sensitivity analysis using a variable cost per unit of $85?
A) $132
B) $134
C) $135
D) $136
E) $133
73) Precise Machinery is analyzing a proposed project that is expected to sell 1,450 units, ±3
percent. The expected variable cost per unit is $139 and the expected fixed costs are $123,000.
Cost estimates are considered accurate within a ±1 percent range. The depreciation expense is
$39,000. The sales price is estimated at $349 per unit, ±3 percent. What is the contribution
margin per unit under the best-case scenario?
A) $137.03
B) $194.33
C) $148.13
D) $187.42
E) $221.86
74) At a production level of 5,280 units, a project has total costs of $150,000. The variable cost
per unit is $23.12. Assume the firm can increase production by 750 units without increasing its
fixed costs. What will the total costs be if 6,000 units are produced?
A) $122,780
B) $124,640
C) $138,720
D) $122,074
E) $166,646
