Fundamentals Of Corporate Finance 9th Canadian Edition By Ross – Test Bank

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) The sales level that results in a project net present value exactly equal to zero is called: 1)
A) Operational break-even.

B) Leveraged break-even.
C) Accounting break-even.
D) Cash break-even.
E) Financial break-even.

Answer: E
Explanation: A)
B)
C)
D)
E)

2) The Franklin Co. is analyzing a proposed project. The company expects to sell 3,500 units, give or take 15 percent. The expected variable cost per unit is $6 and the expected fixed costs are $15,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $6,000. The sales price is estimated at $21 a unit, give or take 3 percent. The company bases their sensitivity analysis on the base case scenario

What is the amount of the fixed cost per unit under the best case scenario?

A) $4.43 B) $3.47 C) $3.85 D) $4.21 E) $3.66

Answer: E
Explanation: A)
B)
C)
D)
E)

3) The analysis of the effects on a project’s net present value when only one variable changes is called ________ analysis.
A) Simulation.

B) Upper and lower bound.

C) Break-even.

D) Sensitivity.

E) Scenario.

Answer: D
Explanation: A)
B)
C)
D)
E)

2)

3)
1

4) You are considering a new project. The project has projected annual depreciation of

$11,600, total annual fixed costs of $29,001.50, and annual total sales of $46,900. The variable cost per unit is $5.70. What is the accounting break-even level of production?
A) 1,125 B) 1,105 C) 1,085 D) 1,015 E) 1,215

Answer: B
Explanation: A)
B)
C)
D)
E)

5) At the accounting break-even level of sales, the operating cash flow is equal to:

A) The depreciation expense.

B) Fixed costs plus depreciation divided by the contribution margin.

C) The net present value.

D) Fixed costs plus depreciation.

E) The contribution margin times the quantity produced.

Answer: A
Explanation: A)
B)
C)
D)
E)

6) If you see a worst case scenario for a project, the analyst is likely using ________.

A) Sensitivity analysis.

B) Base-case analysis.

C) Multiple-outcome analysis.

D) Simulation analysis.

E) Scenario analysis.

Answer: E
Explanation: A)
B)
C)
D)
E)

4)

5)

6)

2

7) Marginal costs ________.

A) Change as a function of the quantity of output produced.

B) (For a given time period) are constant no matter the quantity of output produced.

C) Change as a function of the next unit of output produced.

D) Comprise the sum total of all production expenses of the firm for some time period.

E) Comprise the sum total of all production expenses of the firm for some time period, expressed relative to the total output produced for that same time period.

Answer: C
Explanation: A)
B)
C)
D)
E)

8) To determine the degree to which the projected net present value of a project is dependent upon a single variable you should conduct ________ analysis.
A) Sensitivity.

B) Scenario.

C) Accounting break-even.

D) Financial break-even.

E) Cash break-even.

Answer: A
Explanation: A)
B)
C)
D)
E)

9) Which of the following best describes the term “contingency planning”?

A) The degree to which a firm or project relies on fixed costs.

B) The determination of what happens to NPV estimates when we ask what-if questions.

C) Taking into account the managerial options that are implicit in a project.

D) Investigation of what happens to NPV when only one variable is changed.

E) The change in costs that occurs when there is a small change in output.

Answer: C
Explanation: A)
B)
C)
D)
E)

7)

8)
9)
3

10) A project has earnings before interest and taxes of $6,500, fixed costs of $40,000, a selling price of $12 a unit, and a sales quantity of 10,000 units. Depreciation is $8,500. What is the variable cost per unit?
A) $7.00 B) $6.50 C) $7.25 D) $6.25 E) $6.75

Answer: B
Explanation: A)
B)
C)
D)
E)