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1 | |
The J.K.Baker Co. has developed a new sound storage system (SSS) that has the potential of changing the entire industry. If the firm markets SSS directly to the general public using its own sales force, the device has a 30 percent chance of success. The firm can hire a regional advertiser at a cost of $450,000 and increase the chance of success to 40 percent. J.K. Baker also has the option of hiring a group of national promoters who can launch a national ad campaign which will increase the chance of success to 54 percent. The national ad campaign has a cost of $2.6 million. Conversely, the company can take their product directly to the industry leaders in the sound storage business and convince them to adopt the new technology and have them launch the device. The cost of getting the industry leaders to adopt the new device is $10.7 million with a chance of product success of 88 percent. The NPV of the device if it is a success is $27 million. The NPV of a failure is $0 as the income generated will just cover any costs incurred. The discount rate is 15 percent. Which course of action should the J.K. Baker Co. take, if any, to bring this product to market? |
| | A) | use own sales force and go directly to the public |
| | B) | hire the regional advertiser |
| | C) | hire the group of national promoters |
| | D) | go to the industry leaders |
| | E) | do not go to market with this device |
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2 | |
You have discovered a new soap which lathers well and leaves no soap residue behind. You are trying to decide if you should patent, and then market, this new product. The costs associated with getting a patent are $5,000. The costs associated with the initial marketing are $800,000. There is an 80 percent chance that you will be able to obtain a patent. There is a 35 percent chance that the marketing campaign will be a success. The NPV of a successful marketing campaign is $4.5 million while the NPV of a failed campaign is -$1 million. What should you do if the discount rate is 14 percent? |
| | A) | do nothing |
| | B) | apply for the patent and then do nothing |
| | C) | apply for the patent and launch the marketing campaign |
| | D) | apply for the patent and then wait before launching the marketing campaign |
| | E) | wait to apply for a patent |
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3 | |
Performance Engines, Inc., is considering hiring a new group of engineers to develop a more fuel efficient motor for passenger vehicles. The initial cost of the engineers and other developmental costs is estimated at $15.6 million at time zero. A new motor of this type has an expected payoff of $130 million as of the end of year 1, if successful. The payoff of a failure is $0. This project's chance of success is 15 percent and the discount rate is 17 percent. The NPV of this venture is: |
| | A) | -$4.7 million. |
| | B) | -$3.9 million. |
| | C) | $0. |
| | D) | $1.1 million. |
| | E) | $3.2 million. |
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4 | |
Decision trees emphasize: |
| | A) | the sequence of events and the options that are available at each step of the decision process. |
| | B) | why the initial investment of a project is the most critical to the project's success. |
| | C) | the potential losses of a project more so than the potential gains. |
| | D) | why only some options should be considered in project analysis. |
| | E) | only those options which have at least a 50 percent probability of success. |
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5 | |
The Holiday Candy Co. has developed a new sweet that is both tasty and non-fattening. The payoff to the firm if this product is a success is $140,000. The payoff of a failure is -$36,000. What is the expected payoff if the probability of a success is 33 percent? |
| | A) | -$24,120 |
| | B) | $2,180 |
| | C) | $11,800 |
| | D) | $22,080 |
| | E) | $24,200 |
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6 | |
_____ describes the likelihood of making a bad investment decision because of errors in projected cash flows. |
| | A) | Forecasting risk |
| | B) | Erosion |
| | C) | Scenario risk |
| | D) | Incremental cash flow risk |
| | E) | Operating risk |
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7 | |
After ten years as a general auto mechanic in a local garage, Joe decides he is tired of working for others, especially since business is typically slow and he works partially on commission. Thus, he decides to open his own garage. After estimating the cash flows for his new garage, he determines that having his own garage should generate a large positive net present value. Which of the following is most likely true about his analysis? |
| | A) | The discount rate he used must be too high. |
| | B) | Unless he can find a true source of value in his new venture, he probably made a mistake in estimating his cash flows. |
| | C) | He has likely been overly optimistic about the future and has underestimated future cash flows. |
| | D) | His estimates of initial cash outlays have to be understated. |
| | E) | His analysis is probably correct provided there is major competition in the auto repair business. |
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8 | |
Which one of the following statements regarding net present value (NPV) analysis is correct? |
| | A) | The actual worth of any NPV calculation depends on the accuracy of the cash flow projections used. |
| | B) | NPV calculations are fairly reliable even when the cash flows used are highly questionable. |
| | C) | Negative NPV projects should always be rejected without further scrutiny. |
| | D) | Positive NPV projects that have relatively low levels of fixed costs should be more heavily scrutinized than projects with relatively high levels of fixed costs. |
| | E) | NPV calculations are fairly reliable even when an inappropriate discount rate is used. |
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9 | |
Which one of the following generally has the least forecasting risk? |
| | A) | projected sales |
| | B) | initial investment |
| | C) | projected fixed costs |
| | D) | selling price per unit |
| | E) | total variable costs |
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10 | |
Your company's scientists have developed an exciting new product that is unlike anything presently available to consumers. The net present value of bringing this product to market is positive, yet you are uncertain about the sales projections. The best way for you to test the impact of the sales forecast on the project is to conduct _____ analysis. |
| | A) | sensitivity and payback |
| | B) | payback and break-even |
| | C) | break-even and sensitivity |
| | D) | operating leverage |
| | E) | cost |
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