As the degree of sensitivity of a project to a single variable rises, the:

less important the variable is to the final outcome of the project.

less volatile the project's net present value is to that variable.

greater is the importance of accurately predicting the value of that variable.

greater is the sensitivity of the project to the other variable inputs.

less volatile is the project's outcome.

2

21

A firms 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 firms value. Given this specific desire, which type of analysis should they require for each project and why?

Sensitivity analysis; to identify the key variable that affects a projects profitability

Scenario analysis; to guarantee each project will be profitable

Cash breakeven; to ensure the firm recoups its initial investment

Accounting breakeven; to ensure each project earns its required rate of return

Financial breakeven; to ensure each project has a positive NPV

3

31

A project with a life of 9 years is expected to provide annual sales of $330,000 and costs of $229,000. The project will require an investment in equipment of $595,000, which will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-10 percent. The tax rate is 40 percent. What is the annual operating cash flow for the best-case scenario?

$53,504

$94,140

$120,584

$89,204

$104,894

4

41

A 7-year project is expected to provide annual sales of $221,000 with costs of $97,500. The equipment necessary for the project will cost $360,000 and will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/-15 percent. The tax rate is 35 percent. What is the annual operating cash flow for the worst-case scenario?

$129,329

$49,221

$67,221

$77,946

$44,504

5

51

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:

will never pay back.

has a zero net present value.

is operating at a higher level than if it were operating at its cash break-even level.

is operating at a higher level than if it were operating at its financial break-even level.

is lowering the total net income of the firm.

6

61

A project that has a projected IRR of negative 100 percent will also have a(n):

discounted payback period equal to the life of the project.

operating cash flow that is positive and equal to the depreciation.

net present value that is negative and equal to the initial investment.

payback period that is exactly equal to the life of the project.

net present value that is equal to zero.

7

71

Sun Brite has a new pair of sunglasses it is evaluating. The company expects to sell 6,800 pairs of sunglasses at a price of $163 each and a variable cost of $115 each. The equipment necessary for the project will cost $355,000 and will be depreciated on a straight-line basis over the 7-year life of the project. Fixed costs are $290,000 per year and the tax rate is 34 percent. How sensitive is the operating cash flow to a $1 increase in variable costs per pairs of sunglasses?

$4,039

$4,488

$4,488

$4,039

$4,987

8

81

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:

operating at the accounting break-even point.

operating at the financial break-even point.

facing hard rationing.

operating with zero leverage.

operating at maximum capacity.

9

91

The accounting manager of Gateway Inns has noted that every time the inn's average occupancy rate increases by 3.3 percent, the operating cash flow increases by 4.6 percent. What is the degree of operating leverage if the contribution margin per unit is $47?

.72

.85

1.75

1.18

1.39

10

101

At an output level of 22,500 units, you calculate that the degree of operating leverage is 1.37. What will be the percentage change in operating cash flow if the new output level is 25,000 units?

17.78 percent

16.17 percent

15.22 percent

17.73 percent

15.08 percent