1. An analysis of the relationship between the sales volume and various measures of profitability is called _____ analysis.

a. forecasting b. scenario c. sensitivity d. simulation e. break-even

2. Variable costs:

a. change in direct relationship to the quantity of output produced.

b. are constant in the short-run regardless of the quantity of output produced.

c. are equal to the change in a variable when one more unit of output is produced.

d. are subtracted from fixed costs to compute the contribution margin.

e. form the basis that is used to determine the degree of operating leverage employed by a firm.

3. Fixed costs:

a. change as the quantity of output produced changes.

b. are constant over the short-run regardless of the quantity of output produced.

c. reflect the change in a variable 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.

4. The sales level that results in a projects net income exactly equaling zero is called the _____ break-even.

a. operational

b. leveraged

c. accounting

d. cash

e. present value

5. The sales level that results in a projects net present value exactly equaling zero is called the _____ break-even.

a. operational b. leveraged c. accounting d. cash e. present value

6. Which one of the following is most likely a variable cost? a. office rent b. property taxes c. property insurance d. direct labor costs e. management salaries

7. Which of the following statements concerning variable costs is (are) correct?

I. Variable costs minus fixed costs equal marginal costs.

II. Variable costs are equal to zero when production is equal to zero.

III. An increase in variable costs increases the operating cash flow.

a. II only b. III only c. I and III only d. II and III only e. I and II only

8. All else constant, as the variable cost per unit increases, the:

a. contribution margin decreases.

b. sensitivity to fixed costs decreases.

c. degree of operating leverage decreases.

d. operating cash flow increases.

e. net profit increases.

9. Fixed costs:

I. are variable over long periods of time.

II. must be paid even if production is halted.

III. are generally affected by the amount of fixed assets owned by a firm.

IV. per unit remain constant over a given range of production output.

a. I and III only b. II and IV only c. I, II, and III only d. I, II, and IV only e. I, II, III, and IV

10. All else equal, the contribution margin must increase as:

a. both the sales price and variable cost per unit increase.

b. the fixed cost per unit declines.

c. the variable cost per unit declines.

d. sales price per unit declines.

e. the sales price minus the fixed cost per unit increases.

11. Which of the following statements are correct concerning the accounting break-even point?

I. The net income is equal to zero at the accounting break-even point.

II. The net present value is equal to zero at the accounting break-even point.

III. The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin.

IV. The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin.

a. I and III only b. I and IV only c. II and III only d. II and IV only e. I, II, and IV only

12. All else constant, the accounting break-even level of sales will decrease when the:

a. fixed costs increase.

b. depreciation expense decreases.

c. contribution margin decreases.

d. variable costs per unit increase.

e. selling price per unit decreases.

13. The point where a project produces a rate of return equal to the required return is known as the:

a. point of zero operating leverage.

b. internal break-even point.

c. accounting break-even point.

d. present value break-even point.

e. income break-even point.

14. Which of the following statements are correct concerning the present value break-even point of a project?

I. The present value of the cash inflows equals the amount of the initial investment.

II. The payback period of the project is equal to the life of the project.

III. The operating cash flow is at a level that produces a net present value of zero.

IV. The project never pays back on a discounted basis.

a. I and II only b. I and III only c. II and IV only d. III and IV only e. I, III, and IV only

15. The investment timing decision relates to:

a. how long the cash flows last once a project is implemented.

b. the decision as to when a project should be started.

c. how frequently the cash flows of a project occur.

d. how frequently the interest on the debt incurred to finance a project is compounded.

e. the decision to either finance a project over time or pay out the initial cost in cash.

16. The timing option that gives the option to wait:

I. may be of minimal value if the project relates to a rapidly changing technology.

II. is partially dependent upon the discount rate applied to the project being evaluated.

III. is defined as the situation where operations are shut down for a period of time.

IV. has a value equal to the net present value of the project if it is started today versus the net present value if it is started at some later date.

a. I and III only b. II and IV only c. I and II only d. II, III, and IV only e. I, II, and IV only

17. Last month you introduced a new product to the market. Consumer demand has been overwhelming and appears that strong demand will exist over the long-term. Given this situation, management should consider the option to:

a. suspend.

b. expand.

c. abandon.

d. contract.

e. withdraw.

18. Including the option to expand in your project analysis will tend to:

a. extend the duration of a project but not affect the projects net present value.

b. increase the cash flows of a project but decrease the projects net present value.

c. increase the net present value of a project.

d. decrease the net present value of a project.

e. have no effect on either a projects cash flows or its net present value.

19. Theoretically, the NPV is the most appropriate method to determine the acceptability of a project. A false sense of security can be overwhelm the decision-maker when the procedure is applied properly and the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by:

a. changing the underlying assumptions on which the decision is based.

b. highlights the areas where more and better data are needed.

c. providing a picture of how an event can affect the calculations.

d. All of the above.

e. None of the above.

20. In order to make a decision with a decision tree:

a. one starts farthest out in time to make the first decision.

b. one must begin at time 0.

c. any path can be taken to get to the end.

d. any path can be taken to get back to the beginning.

e. None of the above.

21. In a decision tree, the NPV to make the yes/no decision is dependent on:

a. only the cash flows from successful path.

b. on the path where the probabilities add up to one.

c. all cash flows and probabilities.

d. only the cash flows and probabilities of the successful path.

e. None of the above.

22. In a decision tree, caution should be used in analysis because:

a. early stage decisions are probably riskier and should not likely use the same Discount rate.

b. if a negative NPV is actually occurring, management should opt out of the project and minimize the firms loss.

c. decision trees are only used for financial planning.

d. Both A and C.

e. Both A and B.

23. Sensitivity analysis evaluates the NPV with respect to:

a. changes in the underlying assumptions.

b. one variable changing while holding the others constant.

c. different economic conditions. d. All of the above.

e. None of the above.

24. Sensitivity analysis provides information on:

a. whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive.

b. the need for additional information as it tests each variable in isolation.

c. the degree of difficulty in changing multiple variables together.

d. Both A and B. e.

Both A and C.

25. Fixed production costs are:

a. directly related to labor costs.

b. measured as cost per unit of time.

c. measured as cost per unit of output.

d. dependent on the amount of goods or services produced.

e. None of the above.