Fundamentals of Corporate Finance, 12e (Ross)
Chapter 11 Project Analysis and Evaluation
1) Forecasting risk is defined as the possibility that:
A) some proposed projects will be rejected.
B) some proposed projects will be temporarily delayed.
C) incorrect decisions will be made due to erroneous cash flow projections.
D) some projects will be mutually exclusive.
E) tax rates could change over the life of a project.
2) The key means of defending against forecasting risk is to:
A) rely primarily on the net present value method of analysis.
B) increase the discount rate assigned to a project.
C) shorten the life of a project.
D) identify sources of value within a project.
E) ignore any potential salvage value that might be realized.
3) Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic,
the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type
of analysis is he using?
A) Simulation testing
B) Sensitivity analysis
C) Break-even analysis
D) Rationing analysis
E) Scenario analysis
4) Scenario analysis is best suited to accomplishing which one of the following when analyzing a
project?
A) Determining how fixed costs affect NPV
B) Estimating the residual value of fixed assets
C) Identifying the potential range of reasonable outcomes
D) Determining the minimal level of sales required to break-even on an accounting basis
E) Determining the minimal level of sales required to break-even on a financial basis
5) Which one of the following will be used in the computation of the best-case analysis of a
proposed project?
A) Minimal number of units that are expected to be produced and sold
B) The lowest expected salvage value that can be obtained for a project’s fixed assets
C) The most anticipated sales price per unit
D) The lowest variable cost per unit that can reasonably be expected
E) The highest level of fixed costs that is actually anticipated
6) The base case values used in scenario analysis are the values considered to be the most:
A) optimistic.
B) desired by management.
C) pessimistic.
D) likely to create a positive net present value.
E) likely to occur.
7) Which of the following variables will be forecast at their highest expected level under a best-
case scenario?
A) Fixed costs and units value
B) Variable costs and sales price
C) Fixed costs and sales price
D) Salvage value and units sold
E) Initial cost and variable costs
8) When you assign the lowest anticipated sales price and the highest anticipated costs to a
project, you are analyzing the project under the condition known as:
A) best-case sensitivity analysis.
B) worst-case sensitivity analysis.
C) best-case scenario analysis.
D) worst-case scenario analysis.
E) base-case scenario analysis.
9) Which one of the following statements concerning scenario analysis is correct?
A) The pessimistic case scenario determines the maximum loss, in current dollars, that a firm
could possibly incur from a given project.
B) Scenario analysis defines the entire range of results that could be realized from a proposed
investment project.
C) Scenario analysis determines which variable has the greatest impact on a project’s final
outcome.
D) Scenario analysis helps managers analyze various outcomes that are possible given
reasonable ranges for each of the assumptions.
E) Management is guaranteed a positive outcome for a project when the worst-case scenario
produces a positive NPV.
10) Sensitivity analysis determines the:
A) range of possible outcomes given that most variables are reliable only within a stated range.
B) degree to which the net present value reacts to changes in a single variable.
C) net present value range that can be realized from a proposed project.
D) degree to which a project relies on its initial costs.
E) ideal ratio of variable costs to fixed costs for profit maximization.
11) Assume you graph a project’s net present value given various sales quantities. Which one of
the following is correct regarding the resulting function?
A) The steepness of the function relates to the project’s degree of operating leverage.
B) The steeper the function, the less sensitive the project is to changes in the sales quantity.
C) The resulting function will be a hyperbole.
D) The resulting function will include only positive values.
E) The slope of the function measures the sensitivity of the net present value to a change in sales
quantity.
12) As the degree of sensitivity of a project to a single variable rises, the:
A) less important the variable is to the final outcome of the project.
B) less volatile the project’s net present value is to that variable.
C) greater is the importance of accurately predicting the value of that variable.
D) greater is the sensitivity of the project to the other variable inputs.
E) less volatile is the project’s outcome.
13) A firm’s managers realize they cannot monitor all aspects of their projects but do want to
maintain a constant focus on the key aspect of each project in an attempt to maximize their firm’s
value. Given this specific desire, which type of analysis should they require for each project and
why?
A) Sensitivity analysis; to identify the key variable that affects a project’s profitability
B) Scenario analysis; to guarantee each project will be profitable
C) Cash breakeven; to ensure the firm recoups its initial investment
D) Accounting breakeven; to ensure each project earns its required rate of return
E) Financial breakeven; to ensure each project has a positive NPV
14) Which type of analysis identifies the variable, or variables, that are most critical to the
success of a particular project?
A) Scenario
B) Simulation
C) Break-even
D) Sensitivity
E) Cash flow
15) Simulation analysis is based on assigning a ________ and analyzing the results.
A) narrow range of values to a single variable
B) narrow range of values to multiple variables simultaneously
C) wide range of values to a single variable
D) wide range of values to multiple variables simultaneously
E) single value to each of the variables
16) Which one of the following types of analysis is the most complex to conduct?
A) Scenario
B) Break-even
C) Sensitivity
D) Degree of operating leverage
E) Simulation
17) Scenario analysis is defined as the:
A) determination of the initial cash outlay required to implement a project.
B) determination of changes in NPV estimates when what-if questions are posed.
C) isolation of the effect that a single variable has on the NPV of a project.
D) separation of a project’s sunk costs from its opportunity costs.
E) analysis of the effects that a project’s terminal cash flows has on the project’s NPV.
18) An analysis of the change in a project’s NPV when a single variable is changed is called
________ analysis.
A) forecasting
B) scenario
C) sensitivity
D) simulation
E) break-even
19) Combining scenario analysis with sensitivity analysis can yield a crude form of ________
analysis.
A) forecasting
B) combined
C) complex
D) simulation
E) break-even
20) Variable costs can be defined as the costs that:
A) remain constant for all time periods.
B) remain constant over the short run.
C) vary directly with sales.
D) are classified as noncash expenses.
E) are inversely related to the number of units sold.
21) Fixed costs:
A) change as a small quantity of output produced changes.
B) are constant over the short-run regardless of the quantity of output produced.
C) are defined as the change in total costs when one more unit of output is produced.
D) are subtracted from sales to compute the contribution margin.
E) can be ignored in scenario analysis since they are constant over the life of a project.
22) The change in revenue that occurs when one more unit of output is sold is referred to as:
A) marginal revenue.
B) average revenue.
C) total revenue.
D) erosion.
E) scenario revenue.
23) The change in variable costs that occurs when production is increased by one unit is referred
to as the:
A) marginal cost.
B) average cost.
C) total cost.
D) scenario cost.
E) net cost.
24) By definition, which one of the following must equal zero at the accounting break-even
point?
A) Net present value
B) Depreciation
C) Contribution margin
D) Net income
E) Operating cash flow
25) Which one of these combinations must increase the contribution margin?
A) Increasing both the sales price and the variable cost per unit
B) Increasing the sales quantity and increasing the variable cost per unit
C) Decreasing the sales price and increasing the sales quantity
D) Decreasing both fixed costs and depreciation expense
E) Increasing the sales price and decreasing the variable cost per unit
26) Which of the following are inversely related to variable costs per unit?
A) Sales quantity and sales price
B) Net profit per unit and sales quantity
C) Operating cash flow and sales quantity
D) Operating cash flow per unit and contribution margin per unit
E) Contribution margin per unit and marginal costs
27) Steve, the sales manager for TL Products, wants to sponsor a one-week “Customer
Appreciation Sale” where the firm offers to sell additional units of a product at the lowest price
possible without negatively affecting the firm’s profits. Which one of the following represents
the price that should be charged for the additional units during this sale?
A) Average variable cost
B) Average total cost
C) Average total revenue
D) Marginal revenue
E) Marginal cost
28) The president of Global Wholesalers would like to offer special sale prices to the firm’s best
customers under the following terms:
1. The prices will apply only to units purchased in excess of the quantity normally purchased by
a customer.
2. The units purchased must be paid for in cash at the time of sale.
3. The total quantity sold under these terms cannot exceed the excess capacity of the firm.
4. The net profit of the firm should not be affected.
5. The prices will be in effect for one week only.
Given these conditions, the special sale price should be set equal to the:
A) average variable cost of materials only.
B) average cost of all variable inputs.
C) sensitivity value of the variable costs.
D) marginal cost of materials only.
E) marginal cost of all variable inputs.
29) The contribution margin per unit is equal to the:
A) sales price per unit minus the total costs per unit.
B) variable cost per unit minus the fixed cost per unit.
C) sales price per unit minus the variable cost per unit.
D) pretax profit per unit.
E) aftertax profit per unit.
30) Which of the following values will be equal to zero when a firm is operating at the
accounting break-even level of output?
A) IRR and OCF
B) Net income and contribution margin
C) IRR and net income
D) OCF and NPV
E) Net income and NPV
31) A decrease in which one of the following will increase the accounting break-even quantity?
Assume straight-line depreciation is used and ignore taxes.
A) Sales price per unit
B) Management salaries
C) Variable labor costs per unit
D) Initial fixed asset purchases
E) Fixed costs
32) Webster Iron Works started a new project last year. As it turns out, the project has been
operating at its accounting break-even level of output and is now expected to continue at that
level over its lifetime. Given this, you know that the project:
A) will never pay back.
B) has a zero net present value.
C) is operating at a higher level than if it were operating at its cash break-even level.
D) is operating at a higher level than if it were operating at its financial break-even level.
E) is lowering the total net income of the firm.
33) A project that has a payback period exactly equal to the project’s life is operating at:
A) its maximum capacity.
B) the financial break-even point.
C) the cash break-even point.
D) the accounting break-even point.
E) a zero level of output.
34) Valerie just completed analyzing a project. Her analysis indicates that the project will have a
six-year life and require an initial cash outlay of $120,000. Annual sales are estimated at
$189,000 and the tax rate is 21 percent. The net present value is negative $120,000. Based on
this analysis, the project is expected to operate at the:
A) maximum possible level of production.
B) minimum possible level of production.
C) financial break-even point.
D) accounting break-even point.
E) cash break-even point.
35) A project that has a projected IRR of negative 100 percent will also have a(n):
A) discounted payback period equal to the life of the project.
B) operating cash flow that is positive and equal to the depreciation.
C) net present value that is negative and equal to the initial investment.
D) payback period that is exactly equal to the life of the project.
E) net present value that is equal to zero.
36) Which one of the following characteristics relates to the cash break-even point for a given
project?
A) The project never pays back.
B) The discounted payback period equals the project’s life.
C) The NPV is equal to zero.
D) The IRR equals the required rate of return.
E) The OCF is equal to the depreciation expense.
37) When the operating cash flow of a project is equal to zero, the project is operating at the:
A) maximum possible level of production.
B) minimum possible level of production.
C) financial break-even point.
D) accounting break-even point.
E) cash break-even point.
38) Which one of the following represents the level of output where a project produces a rate of
return just equal to its requirement?
A) Capital break-even
B) Cash break-even
C) Accounting break-even
D) Financial break-even
E) Internal break-even
39) Which one of these is most associated with an IRR of negative 100 percent?
A) Degree of operating leverage
B) Accounting break-even point
C) Contribution margin
D) Simulation analysis
E) Cash break-even point
40) You would like to know the minimum level of sales that is needed for a project to be
accepted based on its net present value. To determine that sales level you should compute the:
A) contribution margin per unit and set that margin equal to the fixed costs per unit.
B) degree of operating leverage at the current sales level.
C) accounting break-even point.
D) cash break-even point.
E) financial break-even point.
41) Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the
following changes that she is considering is most apt to cause that project to produce a positive
NPV instead? Consider each change independently.
A) Decrease the sales price
B) Increase the materials cost per unit
C) Decrease the labor hours per unit produced
D) Decrease the sales quantity
E) Increase the amount of the initial investment in net working capital
42) Given the following, which feature identifies the most desirable level of output for a project?
A) Operating cash flow equal to the depreciation expense
B) Payback period equal to the project’s life
C) Discounted payback period equal to the project’s life
D) Zero IRR
E) Zero operating cash flow