# 2023 1 A project requires an initial investment in equipment of 90 000 and then requires

2023 1 A project requires an initial investment in equipment of 90 000 and then requires

1. A project requires an initial investment in equipment of \$90,000 and then requires an

investment in working capital of \$10,000 at the beginning (t = 0). The project is expected to produce sales revenues of \$120,000 for three years. Manufacturing costs are estimated to be 60% of the revenues. The assets are depreciated using straight-line depreciation. At the end of the project, the firm can sell the equipment for \$10,000. The corporate tax rate is 30% and the cost of capital is 15%.What would the NPV if the discount rate were higher by 10%?

a. \$5648

b. \$3840

c. -\$2735

d. None of the above

2. The following are drawbacks of sensitivity analysis except:

a. It provides ambiguous results

b. Underlying variables are likely to be interrelated

d. All of the above statements are drawbacks of sensitivity analysis

3. Which of the following statements most appropriately describes “Scenario Analysis”

a. It looks at the project by changing one variable at a time

b. It provides the break-even level of sales for the project

c. It looks at different but consistent combination of variables

d. Each of the above statements describes “Scenario Analysis” correctly

4. Financial Calculator Company proposes to invest \$12 million in a new calculator making plant. Fixed costs are \$3 million a year. A financial calculator costs \$10 per unit to manufacture and can be sold for \$30 per unit. If the plant lasts for 4 years and the cost of capital is 20%, what is the break-even level (i.e. NPV = 0) of annual rates? (Approximately) (Assume no taxes.)

a. 150,000 units

b. 342,290 units

c. 381,777 units

d. None of the above

5. Calculator Company proposes to invest \$5 million in a new calculator making plant. Fixed costs are \$2 million a year. A calculator costs \$5/unit to manufacture and can be sold for \$20/unit. If the plant lasts for 3 years and the cost of capital is12%, what is the approximate break-even level (i.e. NPV = 0) of annual sales? (Assume no taxes.) (Approximately)

a. \$133,333 units

b. \$272,117 units

c. \$227,533 units

d. None of the above

6. Firms often calculate a project’s break-even sales using book earnings. Generally, break-even sales based on NPV is:

a. Higher than the one calculated using book earnings

b. Lower than the one calculated using book earnings

c. Equal to the one calculated using book earnings

d. None of the above

7. The accounting break-even point occurs when:

a. The total revenue line cuts the fixed cost line

b. The present value of inflows line cuts the present value of outflows line

c. The total revenue line cuts the total cost line

d. None of the above

8. The NPV break-even point occurs when:

a. The present value of inflows line cuts the present value of outflows line

b. The total revenue line cuts the fixed cost line

c. The total revenue line cuts the total cost line

d. None of the above

9. Financial Calculator Company proposes to invest \$12 million in a new calculator making plant. Fixed costs are \$3 million a year. A financial calculator costs \$10 per unit to manufacture and can be sold for \$30 per unit. If the plant lasts for 4 years and the cost of capital is 20%, what is the accounting break-even level? (Approximately) (Assume no

taxes.)

a. 300,000 units

b. 150,000 units

c. 381,777 units

d. None of the above

10. Calculator Company proposes to invest \$5 million in a new calculator making plant. Fixed costs are \$2 million a year. A calculator costs \$5/unit to manufacture and can be sold for \$20/unit. If the plant lasts for 3 years and the cost of capital is12%, what is the approximate break-even level (accounting) of annual sales? (Assume no taxes.) (Approximately)

a. \$133,334 units

b. \$272,117 units

c. \$244,444 units

d. None of the above

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