CHAPTER 9Risk Analysis, Real Options, and Capital Budgeting Multiple Choice Questions:I、DEFINITIONSSCENARIO ANALYSISb 1、An analysis of what happens to the estimate of the net present value when you examinea number of different likely situations is called _____ analysis、a、forecastingb、scenarioc、sensitivityd、simulatione、break-evenDifficulty level: EasySENSITIVITY ANALYSISc 2、An analysis of what happens to the estimate of net present value when only onevariable is changed is called _____ analysis、a、forecastingb、scenarioc、sensitivityd、simulatione、break-evenDifficulty level: EasySIMULATION ANALYSISd 3、An analysis which combines scenario analysis with sensitivity analysis is called _____analysis、a、forecastingb、scenarioc、sensitivityd、simulatione、break-evenDifficulty level: EasyBREAK-EVEN ANALYSISe 4、An analysis of the relationship between the sales volume and various measures ofprofitability is called _____ analysis、a、forecastingb、scenarioc、sensitivityd、simulatione、break-evenDifficulty level: EasyVARIABLE COSTSa 5、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、reflect 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 afirm、Difficulty level: EasyFIXED COSTSb 6、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、Difficulty level: EasyACCOUNTING BREAK-EVENc 7、The sales level that results in a project’s net income exactly equaling zero is called the_____ break-even、a、operationalb、leveragedc、accountingd、cashe、present valueDifficulty level: EasyPRESENT VALUE BREAK-EVENe 8、The sales level that results in a project’s net present value exactly equaling zero iscalled the _____ break-even、a、operationalb、leveragedc、accountingd、cashe、present valueDifficulty level: EasyII、 CONCEPTSSCENARIO ANALYSISb 9、Conducting scenario analysis helps managers see the:a、impact of an individual variable on the outcome of a project、b、potential range of outcomes from a proposed project、c、changes in long-term debt over the course of a proposed project、d、possible range of market prices for their stock over the life of a project、e、allocation distribution of funds for capital projects under conditions of hard rationing、Difficulty level: EasySENSITIVITY ANALYSISb 10、S ensitivity analysis helps you determine the:a、range of possible outcomes given possible ranges for every variable、b、degree to which the net present value reacts to changes in a single variable、c、net present value given the best and the worst possible situations、d、degree to which a project is reliant upon the fixed costs、e、level of variable costs in relation to the fixed costs of a project、Difficulty level: EasySENSITIVITY ANALYSISc 11、A s the degree of sensitivity of a project to a single variable rises, the:a、lower the forecasting risk of the project、b、smaller the range of possible outcomes given a pre-defined range of values for theinput、c、more attention management should place on accurately forecasting the futurevalue ofthat variable、d、lower the maximum potential value of the project、e、lower the maximum potential loss of the project、Difficulty level: MediumSENSITIVITY ANALYSISc 12、S ensitivity analysis is conducted by:a、holding all variables at their base level and changing the required rate of returnassigned to a project、b、changing the value of two variables to determine their interdependency、c、changing the value of a single variable and computing the resulting change in thecurrent value of a project、d、assigning either the best or the worst possible value to each variable and comparing theresults to those achieved by the base case、e、managers after a project has been implemented to determine how each variable relatesto the level of output realized、Difficulty level: MediumSENSITIVITY ANALYSISd 13、T o ascertain whether the accuracy of the variable cost estimate for a project will havemuch effect on the final outcome of the project, you should probably conduct _____analysis、a、leverageb、scenarioc、break-evend、sensitivitye、cash flowDifficulty level: EasySIMULATIONd 14、S imulation analysis is based on assigning a _____ and analyzing the results、a、narrow range of values to a single variableb、narrow range of values to multiple variables simultaneouslyc、wide range of values to a single variabled、wide range of values to multiple variables simultaneouslye、single value to each of the variablesDifficulty level: MediumSIMULATIONe 15、T he type of analysis that is most dependent upon the use of a computer is _____analysis、a、scenariob、break-evenc、sensitivityd、degree of operating leveragee、simulationDifficulty level: EasyVARIABLE COSTSd 16、W hich one of the following is most likely a variable cost?a、office rentb、property taxesc、property insuranced、direct labor costse、management salariesDifficulty level: EasyVARIABLE COSTSa 17、W hich 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、A n increase in variable costs increases the operating cash flow、a、II onlyb、III onlyc、I and III onlyd、II and III onlye、I and II onlyDifficulty level: MediumVARIABLE COSTSa 18、A ll 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、Difficulty level: MediumFIXED COSTSc 19、F ixed costs:I、are variable over long periods of time、II、must be paid even if production is halted、III、a re generally affected by the amount of fixed assets owned by a firm、IV、p er unit remain constant over a given range of production output、a、I and III onlyb、II and IV onlyc、I, II, and III onlyd、I, II, and IV onlye、I, II, III, and IVDifficulty level: MediumCONTRIBUTION MARGINc 20、T he 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 gap between the sales price and the variable cost per unit widens、d、sales price per unit declines、e、the sales price minus the fixed cost per unit increases、Difficulty level: MediumACCOUNTING BREAK-EVENa 21、W hich of the following statements are correct concerning the accounting break-evenpoint?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、T he quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin、IV、T he quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin、a、I and III onlyb、I and IV onlyc、II and III onlyd、II and IV onlye、I, II, and IV onlyDifficulty level: MediumACCOUNTING BREAK-EVENb 22、A ll 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、Difficulty level: MediumPRESENT VALUE BREAK-EVENd 23、T he point where a project produces a rate of return equal to the required return isknown 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、internal break-even point、Difficulty level: EasyPRESENT VALUE BREAK-EVENb 24、W hich of the following statements are correct concerning the present value break-evenpoint 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、T he operating cash flow is at a level that produces a net present value of zero、IV、T he project never pays back on a discounted basis、a、I and II onlyb、I and III onlyc、II and IV onlyd、III and IV onlye、I, III, and IV onlyDifficulty level: MediumINVESTMENT TIMING DECISIONb 25、T he 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、Difficulty level: MediumOPTION TO WAITe 26、T he 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、i s defined as the situation where operations are shut down for a period of time、IV、h as 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 onlyb、II and IV onlyc、I and II onlyd、II, III, and IV onlye、I, II, and IV onlyDifficulty level: ChallengeOPTION TO EXPANDb 27、L ast month you introduced a new product to the market、 Consumer demand has beenoverwhelming and appears that strong demand will exist over the long-term、 Given thissituation, management should consider the option to:a、suspend、b、expand、c、abandon、d、contract、e、withdraw、Difficulty level: EasyOPTION TO EXPANDc 28、I ncluding the option to expand in your project analysis will tend to:a、extend the duration of a project but not affect the project’s net present value、b、increase the cash flows of a project but decrease the project’s 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 project’s cash flows or its net present value、Difficulty level: MediumSENSITIVITY AND SENARIO ANALYSISd 29、 Theoretically, the NPV is the most appropriate method to determine the acceptabilityof a project、 A false sense of security can be overwhelm the decision-maker whenthe procedure is applied properly and the positive NPV results are accepted blindly、Sensitivity and scenario analysis aid in the process bya、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、Difficulty level: MediumDECSION TREEa 30、 In order to make a decision with a decision treea、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、Difficulty level: MediumDECISION TREEc 31、 In a decision tree, the NPV to make the yes/no decision is dependent ona、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、Difficulty level: MediumDECISION TREEe 32、 In a decision tree, caution should be used in analysis becausea、early stage decisions are probably riskier and should not likely use the same discountrate、b、if a negative NPV is actually occurring, management should opt out of the project andminimize their loss、c、decision trees are only used for planning, not actually daily management、d、Both A and C、e、Both A and B、Difficulty level: MediumSENSITIVITY ANALYSISd 33、 Sensitivity analysis evaluates the NPV with respect toa、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、Difficulty level: MediumSENSITIVITY ANALYSISd 34、 Sensitivity analysis provides information ona、whether the NPV should be trusted, it may provide a false sense of security if allNPVs 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、Difficulty level: MediumFIXED COSTSb 35、 Fixed production costs area、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、Difficulty level: MediumVARIABLE COSTSd 36、 Variable costsa、change as the quantity of output changes、b、are zero when production is zero、c、are exemplified by direct labor and raw materials、d、All of the above、e、None of the above、Difficulty level: EasySENSITIVITY ANALYSISb 37、 An investigation of the degree to which NPV depends on assumptions made about anysingular critical variable is called a(n)a、operating analysis、b、sensitivity analysis、c、marginal benefit analysis、d、decision tree analysis、e、None of the above、Difficulty level: EasySENSITIVITY AND SCENARIOS ANALYSISb 38、 Scenario analysis is different than sensitivity analysisa、as no economic forecasts are changed、b、as several variables are changed together、c、because scenario analysis deals with actual data versus sensitivity analysis which dealswith a forecast、d、because it is short and simple、e、because it is 'by the seat of the pants' technique、Difficulty level: MediumEQUIVALENT ANNUAL COSTc 39、 In the present-value break-even the EAC is used toa、determine the opportunity cost of investment、b、allocate depreciation over the life of the project、c、allocate the initial investment at its opportunity cost over the life of the project、d、determine the contribution margin to fixed costs、e、None of the above、Difficulty level: MediumBREAK-EVENb 40、 The present value break-even point is superior to the accounting break-even pointbecausea、present value break-even is more complicated to calculate、b、present value break-even covers the economic opportunity costs of the investment、c、present value break-even is the same as sensitivity analysis、d、present value break-even covers the fixed costs of production, which the accountingbreak-even does not、e、present value break-even covers the variable costs of production, which the accountingbreak-even does not、Difficulty level: EasyABANDONMENTd 41、 The potential decision to abandon a project has option value becausea、abandonment can occur at any future point in time、b、 a project may be worth more dead than alive、c、management is not locked into a negative outcome、d、All of the above、e、None of the above、Difficulty level: EasyTYPES OF BREAK-EVEN ANALYSISd 42、 Which of the following are types of break-even analysis?a、present value break-evenb、accounting profit break-evenc、market value break-evend、Both A and B、e、Both A and C、Difficulty level: EasyMONTE CARLO SIMULATIONc 43、 The approach that further attempts to model real word uncertainty by analyzingprojects the way one might analyze gambling strategies is calleda、gamblers approach、b、blackjack approach、c、Monte Carlo simulation、d、scenario analysis、e、sensitivity analysis、Difficulty level: MediumMONTE CARLO SIMULATIONc 44、 Monte Carlo simulation isa、the most widely used by executives、b、 a very simple formula、c、provides a more complete analysis that sensitivity or scenario、d、the oldest capital budgeting technique、e、None of the above、Difficulty level: EasyOPTIONS IN CAPITAL BUDGETINGd 45、 Which of the following are hidden options in capital budgeting?a、option to expand、b、timing option、c、option to abandon、d、All of the above、e、None of the above、Difficulty level: EasyIII、PROBLEMSUse this information to answer questions 46 through 50、The Adept Co、 is analyzing a proposed project、 The company expects to sell 2,500 units, give or take 10 percent、 The expected variable cost per unit is $8 and theexpected fixed costs are $12,500、 Cost estimates are considered accurate within a plus or minus 5 percent range、 The depreciation expense is $4,000、 The sale price isestimated at $16 a unit, give or take 2 percent、 The company bases their sensitivityanalysis on the expected case scenario、SCENARIO ANALYSISd 46、W hat is the sales revenue under the optimistic case scenario?a、$40,000b、$43,120c、$44,000d、$44,880e、$48,400Difficulty level: MediumSCENARIO ANALYSISd 47、W hat is the contribution margin under the expected case scenario?a、$2、67b、$3、00c、$7、92d、$8、00e、$8、72Difficulty level: MediumSCENARIO ANALYSISc 48、W hat is the amount of the fixed cost per unit under the pessimistic case scenario?a、$4、55b、$5、00c、$5、83d、$6、02e、$6、55Difficulty level: MediumSENSITIVITY ANALYSISb 49、T he company is conducting a sensitivity analysis on the sales price using a salesprice estimate of $17、 Using this value, the earnings before interest and taxes will be:a、$4,000b、$6,000c、$8,500d、$10,000e、$18,500Difficulty level: MediumSENSITIVITY ANALYSISb 50、T he company conducts a sensitivity analysis using a variable cost of $9、 The totalvariable cost estimate will be:a、$21,375b、$22,500c、$23,625d、$24,125e、$24,750Difficulty level: MediumUse this information to answer questions 51 through 55、The Can-Do Co、 is analyzing a proposed project、 The company expects to sell 12,000 units, give or take 4 percent、 The expected variable cost per unit is $7 and the expected fixed cost is $36,000、 The fixed and variable cost estimates are considered accuratewithin a plus or minus 6 percent range、 The depreciation expense is $30,000、 The tax rate is 34 percent、 The sale price is estimated at $14 a unit, give or take 5 percent、 The company bases their sensitivity analysis on the expected case scenario、SCENARIO ANALYSISa 51、W hat is the earnings before interest and taxes under the expected case scenario?a、$18,000b、$24,000c、$36,000d、$48,000e、$54,000Difficulty level: MediumSCENARIO ANALYSISc 52、W hat is the earnings before interest and taxes under anoptimistic case scenario?a、$22,694、40b、$24,854、40c、$37,497、60d、$52,694、40e、$67,947、60Difficulty level: ChallengeSCENARIO ANALYSISb 53、W hat is the earnings before interest and taxes under the pessimistic case scenario?a、-$566、02b、-$422、40c、-$278、78d、$3,554、50e、$5,385、60Difficulty level: ChallengeSENSITIVITY ANALYSISd 54、W hat is the operating cash flow for a sensitivity analysis using total fixed costs of$32,000?a、$14,520b、$16,520c、$22,000d、$44,520e、$52,000Difficulty level: MediumSENSITIVITY ANALYSISd 55、W hat is the contribution margin for a sensitivity analysis using a variable cost per unitof $8?a、$3b、$4c、$5d、$6e、$7Difficulty level: MediumVARIABLE COSTc 56、A firm is reviewing a project with labor cost of $8、90 per unit, raw materials cost of$21、63 a unit, and fixed costs of $8,000 a month、 Sales are projected at 10,000 unitsover the three-month life of the project、 What are the total variable costs of theproject?a、$216,300b、$297,300c、$305,300d、$313,300e、$329,300Difficulty level: MediumVARIABLE COSTd 57、A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, aselling price of $13 a unit, and a sales quantity of 11,500 units、 Depreciation is$7,500、What is the variable cost per unit?a、$6、75b、$7、00c、$7、25d、$7、50e、$7、75Difficulty level: MediumFIXED COSTb 58、A t a production level of 5,600 units a project has total costs of $89,000、 The variablecost per unit is $11、20、 What is the amount of the total fixed costs?a、$24,126b、$26,280c、$27,090d、$27,820e、$28,626Difficulty level: MediumFIXED COSTe 59、A t a production level of 6,000 units a project has total costs of $120,000、 Thevariable cost per unit is $14、50、 What is the amount of the total fixed costs?a、$25,165b、$28,200c、$30,570d、$32,000e、$33,000Difficulty level: MediumCONTRIBUTION MARGINc 60、W ilson’s Meats has computed their fixed costs to be $、60 for every pound of meatthey sell given an average daily sales level of 500 pounds、 They charge $3、89 perpound of top-grade ground beef、 The variable cost per pound is $2、99、 What is thecontribution margin per pound of ground beef sold?a、$、30b、$、60c、$、90d、$2、99e、$3、89Difficulty level: MediumCONTRIBUTION MARGINe 61、R alph and Emma’s is considering a project with total sales of $17,500, total variablecosts of $9,800, total fixed costs of $3,500, and estimated production of 400 units、Thedepreciation expense is $2,400 a year、 What is the contribution margin per unit?a、$4、50b、$10、50c、$14、14d、$19、09e、$19、25Difficulty level: MediumACCOUNTING BREAK-EVENa 62、Y ou are considering a new project、 The project has projected depreciation of $720,fixed costs of $6,000, and total sales of $11,760、 The variable cost per unit is$4、20、 What is the accounting break-even level of production?a、1,200 unitsb、1,334 unitsc、1,372 unitsd、1,889 unitse、1,910 unitsDifficulty level: MediumACCOUNTING BREAK-EVENb 63、T he accounting break-even production quantity for a project is 5,425 units、 The fixedcosts are $31,600 and the contribution margin is $6、 What is the projecteddepreciation expense?a、$700b、$950c、$1,025d、$1,053e、$1,100Difficulty level: MediumACCOUNTING BREAK-EVENd 64、A project has an accounting break-even point of 2,000 units、 The fixed costs are$4,200 and the depreciation expense is $400、 The projected variable cost per unit is$23、10、 What is the projected sales price?a、$20、80b、$21、00c、$21、20d、$25、40e、$25、60Difficulty level: MediumACCOUNTING BREAK-EVENa 65、A proposed project has fixed costs of $3,600, depreciation expense of $1,500, and asales quantity of 1,300 units、 What is the contribution margin if the projected level ofsales is the accounting break-even point?a、$3、92b、$4、14c、$4、50d、$4、80e、$5、00Difficulty level: MediumPRESENT VALUE BREAK-EVENc 66、A project has a contribution margin of $5, projected fixed costs of $12,000, projectedvariable cost per unit of $12, and a projected present value break-even point of 5,000units、 What is the operating cash flow at this level of output?a、$1,000b、$12,000c、$13,000d、$68,000e、$73,000Difficulty level: MediumPRESENT VALUE BREAK-EVENa 67、T hompson & Son have been busy analyzing a new product、 They have determined thatan operating cash flow of $16,700 will result in a zero net present value, which is acompany requirement for project acceptance、 The fixed costs are $12,378 and thecontribution margin is $6、20、 The company feels that they can realistically capture10 percent of the 50,000 unit market for this product、 Should the company develop the new product? Why or why not?a、yes; because 5,000 units of sales exceeds the quantity required for a zero net presentvalueb、yes; because the internal break-even point is less than 5,000 unitsc、no; because the firm can not generate sufficient sales to obtain at least a zero netpresent valued、no; because the project has an expected internal rate of return of negative 100percente、no; because the project will not pay back on a discounted basisDifficulty level: ChallengePRESENT VALUE BREAK-EVENe 68、K urt Neal and Son is considering a project with a discounted payback just equal to theproject’s life、 The projections include a sales price of $11, variable cost per unit of$8、50, and fixed costs of $4,500、 The operating cash flow is $6,200、 What is the break-even quantity?a、1,800 unitsb、2,480 unitsc、3,057 unitsd、3,750 unitse、4,280 unitsDifficulty level: MediumDECISION TREE NET PRESENT VALUEb 69、 At stage 2 of the decision tree it shows that if a project is successful, the payoff will be$53,000 with a 2/3 chance of occurrence、 There is also the 1/3 chance of a $-24,000payoff、 The cost of getting to stage 2 (1 year out) is $44,000、 The cost of capitalis 15%、 What is the NPV of the project at stage 1?a、$-13,275b、$-20,232c、$ 2,087d、$ 7,536e、Can not be calculated without the exact timing of future cash flows、Difficulty level: Mediumpresent value?a、$ 48、6 millionb、$ 80、9 millionc、$108、2 milliond、$181、4 millione、None of the above、Difficulty level: ChallengeDECISION TREEb 71、 If the company has a discount rate of 17%, should they decide to invest?a、yes, NPV = $ 2、2 millionb、yes, NPV = $ 21、6 millionc、no, NPV = $-1、9 milliond、yes, NPV = $ 8、6 millione、No, since more than one branch is NPV = 0 or negative you must reject、Difficulty level: ChallengeACCOUNTING BREAK-EVENe 72、 The Mini-Max Company has the following cost information on their new prospectiveproject、 Calculate the accounting break-even point、Initial investment: $700Fixed costs: $200 per yearVariable costs: $3 per unitDepreciation: $140 per year、Price: $8 per unitDiscount rate: 12%Project life: 5 yearsTax rate: 34%a、25 units per yearb、68 units per yearc、103 units per yeard、113 units per yeare、None of the above、Difficulty level: MediumPRESENT VALUE BREAK-EVENd 73、 The Mini-Max Company has the following cost information on their new prospectiveproject、 Calculate the present value break-even point、Initial investment: $700Fixed costs are $ 200 per yearVariable costs: $ 3 per unitDepreciation: $ 140 per yearPrice: $8 per unitDiscount rate: 12%Project life: 3 yearsTax rate: 34%a、68 units per yearb、75 units per yearc、84 units per yeard、114 units per yeare、None of the above、Difficulty level: ChallengeACCOUNTING BREAK-EVENd 74、 From the information below, calculate the accounting break-even point、Initial investment: $2,000Fixed costs are $2,000 per yearVariable costs: $6 per unitDepreciation: $250 per yearPrice: $20 per unitDiscount rate: 10%Project life: 4 yearsTax rate: 34%a、88 units per yearb、100 units per yearc、143 units per yeard、161 units per yeare、None of the above、Difficulty level: ChallengePRESENT VALUE BREAK-EVENc 75、 Given the following information, calculate the present value break-even point、Initial investment: $2,000Fixed costs: $2,000 per yearVariable costs: $6 per unitDepreciation: $ 250 per yearPrice: $20 per unitDiscount rate: 10%Project life: 4 yearsTax rate: 34%a、100 units per yearb、143 units per yearc、202 units per yeard、286 units per yeare、None of the above、Difficulty level: ChallengeTIMING OPTIONS。