1. If a 20% reduction in a project’s forecast sales would still result in a positive NPV, then sensitivity analysis would suggest:
a. that there is little point in further market research.
b. that a more detailed sales forecast is required.
c. that the initial sales forecasts were inflated.
d. that more of the company’s overhead costs can be allocated to this product.
2. A firm has a tract of timber. The future growth rate of the trees and the price of lumber are uncertain. The firm:
a. has an expansion option.
b. has an option to vary the production technology.
c. should harvest the timber immediately if NPV is positive.
d. has a timing option.
3. The greater the ratio of variable costs to sales, the:
a. more each additional sale contributes to the coverage of fixed costs.
b. lower the level of profitability.
c. more units that must be sold to cover fixed charges.
d. lower the benefit of conducting a sensitivity analysis.
4. The option to switch between using oil or natural gas in a power station is:
a. an option to expand.
b. an option to abandon.
c. a production flexibility option.
d. a timing option.
5. Assume a 5-year project has a base-case NPV of $213,000, a tax rate of 34%, and a cost of capital of 14%. What will be the worst-case NPV if the annual after-tax cash flows are reduced in that scenario by $35,000 for each of the 5 years?
a. $92,842.17
b. $120,157.83
c. $92,842.17
d. $120,157.83
6. Which one of these projects would you always reject?
a. High operating leverage, sales projected at the accounting break-even level, and no option to abandon or expand.
b. High operating leverage, sales projected at the NPV break-even level, and an option to abandon or expand.
c. Low operating leverage, sales projected at the accounting break-even level, and an option to abandon or expand.
d. Low operating leverage, sales projected at the NPV break-even level, and an option to abandon or expand.
7. If project sales exceed the accounting break-even point, but the project has a negative EVA, then the project has a:
a. positive NPV but earns less than the discount rate.
b. negative NPV but earns more than the discount rate.
c. net loss on the income statement.
d. net profit but negative NPV.
8. What is the economic break-even level of sales for a project costing $4,000,000 and generating annual cash flows equal to 0.30 × sales ? $450,000? Assume the project will last 10 years and require a discount rate of 12%.
a. $2,093,654
b. $2,359,047
c. $3,859,789
d. $13,783,333
9. If the firm's degree of operating leverage is 4.5, what percentage change in sales will result in a 3% rise in profits?
a. 0.33%
b. 0.67%
c. 3.03%
d. 1.50%