公司理财原版题库Chap008

Chapter 8

Strategy and Analysis in Using Net Present Value

Multiple Choice Questions

1.

Theoretically, the NPV is the most appropriate method to determine he acceptability of a project. A

false sense of security 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 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.

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.

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

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

86

Test Bank, Chapter 8

Use 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.

t = 0

Success

Test

Cost

$$20,000,000

.6

t = 1

Invest

$$100,000,000

Cash Flow After Tax

Years 2

–

5

$$66,000,000/year

Do Not Invest

NPV = $$ 0

.4

Failure

NPV = $$-20,000,000

Do not test

4.

If the company has a discount rate of 17%, what is the value closest to time 1 net present 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

Rationale:

NPV

1

= Pr[COST + CFAT*A.

17,4]

= NPV

1

= .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:

NPV

0

= NPV

1

/(1+r) C

0

= ($$48,632,106/1.17) $$20,000,000) = $$21,565,903

Ross/Westerfield/Jaffe, Corporate Finance, 7/e

87

6.

In a decision tree, the NPV to make the yes/no decision is dependent on

A)

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.

Answer: C Difficulty: Medium Page: 211-213

7.

In a decision tree, caution should be used in analysis because

A)

early stage decisions are probably riskier and should not likely use 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 used 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 false sense of security 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 services produced.

E)

None of the above.

Answer: B Difficulty: Medium Page: 214

88

Test Bank, Chapter 8

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)

sensitivity 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 sensitivity analysis

A)

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 deals with a

forecast.

D)

because it is short and simple.

E)

because it is 'by the seat 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.

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 series of options is useful to strategic analysis because

A)

contingent results may provide an option to bailout of a project with subsequent poor

outcomes.

B)

the value of the project should be considered as the NPV plus the value of the option.

C)

strong markets and subsequent expansion options should be considered at time 0.

D)

All of the above.

E)

None of the above.

Answer: D Difficulty: Medium Page: 223-227

Ross/Westerfield/Jaffe, Corporate Finance, 7/e

89

16.

In the present-value break-even the EAC is used 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 present value break-even point is superior to the accounting break-even point because

A)

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 accounting

break-even does not.

E)

present value break-even covers the variable costs of production, which the accounting

break-even does not.

Answer: B Difficulty: Medium Page: 219

18.

The potential decision to abandon a project has option value because

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

90

Test Bank, Chapter 8