Chapter 8
Strategy and Analysis in Using Net Prent Value Multiple Choice Questions
1. Theoretically, the NPV is the most appropriate method to determine he acceptability of a project. A
fal n of curity can be overwhelm the decision-maker when the procedure is applied
properly and the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by
A) changing the underlying assumptions on which the decision is bad.
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.
Answer: D Difficulty: Medium Page: 213-216
2. In order to make a decision with a decision tree
A) 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.
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E) None of the above.
Answer: A Difficulty: Medium Page: 213
3. 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 $-24,000 payoff. The cost of getting
to stage 2 (1 year out) is $44,000. The cost of capital is 15%. What is the NPV of the project at stage 1?
A) $-13,275
B) $-20,232
C) $ 2,087
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D) $ 7,536
E) Can not be calculated without the exact timing of future cash flows.
Answer: B Difficulty: Hard Page: 213
Rationale:
$-44,000 + [((2/3($53,000)) + (1/3($-24,000))) / 1.15] = $-20,232
U the following to answer questions 4-5:
The Quick-Start Company has the following pattern of potential cash flows with their planned investment in a new cold weather starting system for fuel injected cars.
4. If the company has a discount rate of 17%, what is the value clost to time 1 net prent value?
A) $ 48.6 million
B) $ 80.9 million
C) $108.2 million
D) $181.4 million
E) None of the above.
Answer: A Difficulty: Medium Page: 213成长的故事
Rationale:
NPV1 = Pr[COST + CFAT*A.17,4] = NPV1 = .6[$-100,000,000+$66,000,000(2.7432)] =
$48,632,106
5. If the company has a discount rate of 17%, should they decide to invest?
A) yes, NPV = $ 2.2 million
B) yes, NPV = $ 21.6 million
C) no, NPV = $-1.9 million
D) yes, NPV = $ 8.6 million
E) No, since more than one branch is NPV = 0 or negative you must reject.
Answer: B Difficulty: Hard Page: 213
Rationale:
NPV0 = NPV1/(1+r) C0 = ($48,632,106/1.17) $20,000,000) = $21,565,903
吸湿盒6. In a decision tree, the NPV to make the yes/no decision is dependent on
A) only the cash flows from successful path.创业艰难百战多
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.
Answer: C Difficulty: Medium Page: 211-213
7. In a decision tree, caution should be ud in analysis becau
A) early stage decisions are probably riskier and should not likely u the same discount rate.
B) if a negative NPV is actually occurring, management should opt out of the project and
minimize their loss.
C) decision trees are only ud for planning, not actually daily management.
D) Both A and C.
E) Both A and B.
Answer: E Difficulty: Medium Page: 212-213
8. Sensitivity analysis evaluates the NPV with respect to
A) 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.
Answer: D Difficulty: Medium Page: 214-216
9. Sensitivity analysis provides information on
A) whether the NPV should be trusted, it may provide a fal n of curity if all NPVs 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.
Answer: D Difficulty: Medium Page: 216
10. Fixed production costs are
A) 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 rvices produced.
E) None of the above.
Answer: B Difficulty: Medium Page: 214
11. Variable costs
A) 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.
Answer: D Difficulty: Medium Page: 214
12. An investigation of the degree to which NPV depends on assumptions made about any singular
critical variable is called a(n)
A) operating analysis.
B) nsitivity analysis.
C) marginal benefit analysis.
D) decision tree analysis.
E) None of the above.
Answer: B Difficulty: Easy Page: 214
13. Scenario analysis is different than nsitivity analysis
A) as no economic forecasts are changed.
B) as veral variables are changed together.
C) becau scenario analysis deals with actual data versus nsitivity analysis which deals with a
forecast.
D) becau it is short and simple.
E) becau it is 'by the at of the pants' technique.
Answer: B Difficulty: Medium Page: 216
14. The accounting profit break-even point occurs when
A) the total revenue curve cuts the total cost curve.
B) the total revenue curve cuts the fixed cost curve.
C) the variable cost curve cuts the total cost curve.
美国双子大楼D) the total revenue curve cuts the variable cost curve.
E) None of the above.
Answer: A Difficulty: Easy Page: 218
15. Viewing capital budgeting decisions as a ries of options is uful to strategic analysis becau
A) contingent results may provide an option to bailout of a project with subquent poor
outcomes.
B) the value of the project should be considered as the NPV plus the value of the option.
C) strong markets and subquent expansion options should be considered at time 0.
D) All of the above.
E) None of the above.
有趣的灯谜Answer: D Difficulty: Medium Page: 223-227
16. In the prent-value break-even the EAC is ud to
A) 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.
Answer: C Difficulty: Medium Page: 218
17. The prent value break-even point is superior to the accounting break-even point becau
A) prent value break-even is more complicated to calculate.
B) prent value break-even covers the economic opportunity costs of the investment.
C) prent value break-even is the same as nsitivity analysis.
D) prent value break-even covers the fixed costs of production, which the accounting
break-even does not.
E) prent value break-even covers the variable costs of production, which the accounting
daily怎么读
break-even does not.
Answer: B Difficulty: Medium Page: 219
18. The potential decision to abandon a project has option value becau
A) 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.
Answer: D Difficulty: Easy Page: 213
19. The Mini-Max Company has the following cost information on their new prospective project.
Calculate the accounting break-even point.
Initial investment: $700
Fixed costs: $200 per year
Variable costs: $3 per unit
Depreciation: $140 per year.
Price: $8 per unit
Discount rate: 12%
Project life: 5 years
Tax rate: 34%
A) 25 units per year
B) 68 units per year
C) 103 units per year
D) 113 units per year
E) None of the above.
Answer: B Difficulty: Medium Page: 217-218
Rationale:
Contribution Margin = ($8 - $3) (1 0.34) = $3.30
After-tax (Fixed Cost + Depreciation) = ($200 + $140) (1 0.34) = $224
Accounting BEP = $224/$3.30 = 67.88 = 68 units
