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Exam 11: Project Analysis and Evaluationpart Five: Risk and Return

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Question 1

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Cool Shades,Inc.(CSI) manufactures biotech sunglasses.The variable materials cost is $1.69 per unit,and the variable labor cost is $3.04 per unit.Suppose the firm incurs fixed costs of $750,000 during a year in which total production is 450,000 units and the selling price is $11.50 per unit.What is the cash break-even point?

A) 76,453 units
B) 88,652 units
C) 110,783 units
D) 128,907 units
E) 140,768 units

F) A) and D)
G) D) and E)

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Question 2

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-In an effort to capture the large jet market,Hiro Airplanes invested $12.68 billion developing its B490,which is capable of carrying 800 passengers.The plane has a list price of $275 million.In discussing the plane,Hiro Airplanes stated that the company would break-even when 246 B490s were sold.Assume the break-even sales figure given is the cash flow break-even.Suppose the sales of the B490 last for only 9 years.How many airplanes must Hiro Airplanes sell per year to provide its shareholders a 19 percent rate of return on this investment?

A) 47.17
B) 52.48
C) 59.09
D) 63.10
E) 68.40

F) B) and E)
G) A) and C)

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Question 3

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Theresa is analyzing a project that currently has a projected NPV of zero.Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently. I.increase the quantity sold II.decrease the fixed leasing cost for equipment III.decrease the labor hours needed to produce one unit IV.increase the sales price

The accounting break-even production quantity for a project is 12,320 units.The fixed costs are $216,000 and the contribution margin per unit is $28.The fixed assets required for the project will be depreciated on straight-line basis to zero over the project's 5-year life.What is the amount of fixed assets required for this project?

Which of the following variables will be at their highest expected level under a worst case scenario? I.fixed cost II.sales price III.variable cost IV.sales quantity

Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units,plus or minus 2 percent.The expected variable cost per unit is $11 and the expected fixed costs are $287,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit,plus or minus 3 percent.What is the earnings before interest and taxes under the base case scenario?

Which of the following values will be equal to zero when a firm is producing the accounting break-even level of output? I.operating cash flow II.internal rate of return III.net income IV.payback period

By definition,which one of the following must equal zero at the accounting break-even point?

The change in variable costs that occurs when production is increased by one unit is referred to as the:

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:

The Metal Shop produces 1.8 million metal fasteners a year for industrial use.At this level of production,its total fixed costs are $320,000 and its total costs are $522,000.The firm can increase its production by 5 percent,without increasing either its total fixed costs or its variable costs per unit.A customer has made a one-time offer for an additional 50,000 units at a price per unit of $0.10.Should the firm sell the additional units at the offered price? Why or why not?

Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units,plus or minus 4 percent.The expected variable cost per unit is $11 and the expected fixed costs are $290,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit,give or take 3 percent.What is the operating cash flow under the best case scenario?

Assume you graph a project's net present value given various sales quantities.Which one of the following is correct regarding the resulting function?

Which of the following are inversely related to variable costs per unit? I.contribution margin per unit II.number of units sold III.operating cash flow per unit IV.net profit per unit

You are considering a new product launch.The project will cost $630,000,have a 5-year life,and have no salvage value;depreciation is straight-line to zero.Sales are projected at 160 units per year,price per unit will be $24,000,variable cost per unit will be $12,000,and fixed costs will be $283,000 per year.The required return is 12 percent and the relevant tax rate is 34 percent.Based on your experience,you think the unit sales,variable cost,and fixed cost projections given here are probably accurate to within ±9 percent.What is the worst case NPV?

Which one of the following statements concerning scenario analysis is correct?

Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life.The projections include a sales price of $38,variable cost per unit of $18.50,and fixed costs of $32,000.The operating cash flow is $19,700.What is the break-even quantity?

A project has the following estimated data: price = $74 per unit;variable costs = $39.22 per unit;fixed costs = $6,500;required return = 8 percent;initial investment = $8,000;life = 4 years.Ignore the effect of taxes.What is the degree of operating leverage at the financial break-even level of output?

The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000,depreciation of $38,500,variable costs per unit of $17.90 and an estimated sales price of $26.50 per unit.How many units must the firm sell to break-even on a cash basis?

The change in revenue that occurs when one more unit of output is sold is referred to as: