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Exam 11: Some Lessons From Recent Capital Market History

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Question 1

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A project has a unit price of $5,000, a variable cost per unit of $3,750, fixed costs of $17,000,000, and depreciation expense of $6,970,000.What is the accounting break-even quantity?

A) 6,970 units
B) 10,030 units
C) 17,000 units
D) 18,470 units
E) 19,176 units

F) A) and B)
G) A) and C)

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Question 2

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Fixed costs:

A) change as a small quantity of output produced changes.
B) are constant over the short-run regardless of the quantity of output produced.
C) are defined as the change in total costs 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.

F) C) and D)
G) A) and E)

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Question 3

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McGilla Golf has decided to sell a new line of golf clubs.The clubs will sell for $500 per set and have a variable cost of $200 per set.The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years.The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs.The high-priced clubs sell at $700 and have variable costs of $300.The company will also increase sales of its cheap clubs by 9,000 sets.The cheap clubs sell for $200 and have variable costs of $100 per set.The fixed costs each year will be $7,559,000.The company has also spent $1,133,000 on research and development for the new clubs.The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis over the life of the project.The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project.The tax rate is 40 percent, and the cost of capital is 8 percent.What is the IRR?

A project has a projected IRR of negative 100 percent.Which one of the following statements must also be true concerning this project?

An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used. I.annual salary for the firm's president II.contribution margin per unit III.cost of equipment required by a project IV.variable cost per unit

Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear.Consider a hybrid model that has a list price of $5,500 (including tax consequences) more than a comparable car with a traditional gasoline engine.Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be $420 more than the traditional model.The EPA mileage estimate is 23 mpg for the traditional model and 25 mpg for the hybrid model.Assume the appropriate interest rate is 10 percent, all cash flows occur at the end of the year, you drive 15,900 miles per year, and keep either car for 6 years.What price per gallon would make the decision to buy they hybrid worthwhile?

Which one of the following statements concerning scenario analysis is correct?

Which of the following are inversely related to variable costs per unit? I.contribution margin per unit II.number of units sold III.operating cash flow per unit IV.net profit per unit

Ted is analyzing a project using simulation.His focus is limited to the short-term.To ease the simulation process, he is combining expenses into various categories.Which one of the following should he include in the fixed cost category?

In an effort to capture the large jet market, Hiro Airplanes invested $12.68 billion developing its B490, which is capable of carrying 800 passengers.The plane has a list price of $275 million.In discussing the plane, Hiro Airplanes stated that the company would break-even when 246 B490s were sold.Assume the break-even sales figure given is the cash flow break-even.Suppose the sales of the B490 last for only 9 years.How many airplanes must Hiro Airplanes sell per year to provide its shareholders a 19 percent rate of return on this investment?

You are the manager of a project that has a 2.8 degree of operating leverage and a required return of 14 percent.Due to the current state of the economy, you expect sales to decrease by 7 percent next year.What change should you expect in the operating cash flows next year given your sales prediction?

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:

Cantor's has been busy analyzing a new product.Thus far, management has determined that an OCF of $218,200 will result in a zero net present value for the project, which is the minimum requirement for project acceptance.The fixed costs are $329,000 and the contribution margin per unit is $211.The company feels that it can realistically capture 2.5 percent of the 110,000 unit market for this product.The tax rate is 34 percent and the required rate of return is 11 percent.Should the company develop the new product? Why or why not?

A project has an accounting break-even point of 15,329 units.The fixed costs are $382,000 and the projected variable cost per unit is $29.10.The project will require $780,000 for fixed assets which will be depreciated straight-line to zero over the project's 6-year life.What is the projected sales price per unit?

Forecasting risk is defined as the possibility that:

Scenario analysis is defined as the:

Mountain Gear can manufacture mountain climbing shoes for $15.25 per pair in variable raw material costs and $18.46 per paid in variable labor costs.The shoes sell for $135 per pair.Last year, production was 170,000 pairs and fixed costs were $830,000.What is the minimum acceptable total revenue the company should accept for a one-time order for an extra 10,000 pairs?

When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

Precise Machinery is analyzing a proposed project.The company expects to sell 2,300 units, give or take 5 percent.The expected variable cost per unit is $260 and the expected fixed costs are $589,000.Cost estimates are considered accurate within a plus or minus 4 percent range.The depreciation expense is $129,000.The sales price is estimated at $750 per unit, plus or minus 3 percent.What is the sales revenue under the worst case scenario?

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: