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Multiple Choice Quiz
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1

What happens to the NPV of a one-year project if fixed costs are increased from $200 to $300, the firm is profitable, has a 35% tax rate and employs a 12% cost of capital?
A)NPV decreases by $58.04
B)NPV decreases by $89.29
C)NPV increases by $89.29
D)NPV increases by $58.04
2

If sensitivity analysis indicates that none of the individual variables, under pessimistic conditions, will cause a negative NPV, then the:
A)interaction of the variables should be considered
B)economic forecasts are possibly overly optimistic
C)project's discount rate should be reduced
D)project is assured to be successful
3

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then:
A)fixed costs should be traded for variable costs.
B)variable costs should be traded for fixed costs.
C)the project should not be undertaken.
D)additional marketing analysis may be beneficial before proceeding.
4

How much could NPV be affected by a worst-case scenario of 17.5% reduction from the $2 million in expected annual cash flows on a four-year project with 12% cost of capital?
A)$350,000.00
B)$678,897.46
C)$1,063,072.27
D)$1,413,072.27
5

What is the break-even level of revenues for a firm with $5 million in sales, variable costs of $3 million, fixed costs of $1 million and depreciation of $750,000?
A)$5,000,000.00
B)$4,375,000.00
C)$2,500,000.00
D)$1,093,750.00
6

How much does each additional sales dollar contribute toward profit for a firm with $3.5 million break-even revenue and $1.75 million in fixed costs including depreciation?
A)$0.25
B)$0.33
C)$0.50
D)$0.75
7

Calculate the break even level of sales assuming: $750,000 in fixed costs, $250,000 depreciation expense, and variable costs to sales ratio of 60%.
A)$833,333.33
B)$1,250,000.00
C)$1,666,666.67
D)$2,500,000.00
8

Calculate the ratio of variable-costs-to-sales for a firm with $4 million accounting break-even revenues, $1 million fixed costs and $600,000 depreciation.
A)25.00%
B)33.67%
C)50.00%
D)60.00%
9

Approximately how much was paid to invest in a project that has an NPV break-even level of sales of $5 million, cash flows determined by: .12*Sales - $375,000, an eight-year life, and a 10% discount rate?
A)$1,200,358.40
B)$1,975,876.43
C)$2,613,156.42
D)$2,987,473.67
10

What percentage change in sales occurs if profits increase by 7.5% when the firm's degree of operating leverage is 2.3?
A)1.75%
B)2.33%
C)3.26%
D)4.15%
11

A decision tree shows a 50% probability of $750,000 in returns and a 30% chance of $175,000 in returns. What is the maximum you would invest today in this project if both cash flows occur one year in the future and the discount rate is 12%?
A)$190,848.21
B)$381,696.43
C)$447,235.67
D)$567,989.12
12

An example of a real option is:
A)The option to expand
B)The option to abandon a project
C)The option to wait before investing
D)All of the above
13

A manufacturer contemplates a change in technology that would reduce fixed costs from $750,000 to $500,000, and reduce depreciation expense from $150,000 to $100,000. However, the ratio of variable costs to sales will increase from 65% to 75%. What will be the new break-even level of revenues?
A)$3,600,000
B)$2,400,000
C)$1,142,085
D)$900,000
14

The opportunity to abandon a project loses some of its value when:
A)secondary markets exist and are active
B)the future is relatively certain
C)markets are extremely competitive
D)fixed costs are high
15

EVA is income that is measured after deducting
A)operating costs
B)the cost of capital
C)fixed costs
D)variable costs





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