Q&A Hero

Q: Sechssonic has found that it is indifferent between purchasing a high-capacity vacuum sealing machine or a lower capacity machine as long as sales are 200 units per month. The price of each sealed beam light is $50. The high-capacity machine has cash expenses of $10,000 per month, while the other alternative has cash expenses of $5,000 per month and depreciation and amortization expenses of $2,000 per month. Under high capacity, the variable costs per unit are $10; and they are $40 for the other alternative. If the firm bases its decisions on the accounting operating profit break-even, then what are the depreciation expenses under the high-capacity alternative?A) $3,000B) $4,000C) $9,000D) $5,000

Q: EpicSept is about to introduce a new employee monitoring tool and has determined that it will charge $100 per unit. The firm must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortization expenses of $2,000. Otherwise the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortization expenses of $500. If EBIT Break-even is how the firm evaluates its projects, then above what level of expected sales should EpicSept choose the high fixed cost alternative?A) 60 unitsB) 90 unitsC) 120 unitsD) 180 units

Q: Mexmagnet is introducing a new game system that promises to never become outdated. Mexmagnet will sell the systems for $225, and it will accrue $150 in variable costs to produce. If cash fixed expenses are $30 million per year and the depreciation and amortization expenses are $7.5 million per year, then what is the accounting operating profit break-even point for Mexmagnet?A) 621,000 unitsB) 415,077 unitsC) 200,000 unitsD) 500,000 units

Q: CoTres's Brakes is introducing a new revolutionary brake-pad for vehicles that will never wear out. CoTres's will sell the pads for $150 a pair and they will cost $100 in variable costs to produce. If cash fixed expenses are $2,500 per year and the depreciation and amortization expenses are $900 per year, then what is the accounting operating profit break-even point for the company?A) 86 pairsB) 28 pairsC) 57 pairsD) 68 pairs

Q: A cement contractor has determined that he will maximize pretax operating cash flow buying a large cement truck if he is able to sell more than 550 yards of cement per month. The price of a yard of cement is $62, and the variable costs for a large truck are $22 per yard. The variable costs for a small truck are $44 per yard, and the fixed costs for the small truck are $12,000. What are the fixed costs associated with the large truck?A) $20,000B) $12,000C) $24,100D) $35,000

Q: ElecHuit Inc. is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $11,000 per year versus the $2,500 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $32. The firm will charge $62 for each textbook and has determined that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 850 books. What is the variable cost per unit under the low-capacity machine scenario? A) $25 B) $42 C) $35 D) $89

Q: Dreiphosis Corp. is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $12,000 per year versus the $3,000 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $33. The firm will charge $66 for each textbook and has determined that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 1,000 books. What is the contribution margin under the low-capacity machine scenario? A) $41 B) $24 C) $32 D) $46

Q: Ranbow Inc.is about to introduce a new LED clock and has determined that it will charge $35 per clock. The firm must decide whether or not to purchase a high-capacity clock-making machine. If the high-capacity machine is selected, then the fixed costs for the firm will be $4,000 per year, with variable costs of $6 per clock. Otherwise the fixed costs will be $800, with variable costs of $16 per clock. Above what level of expected sales should Ranbow Inc. choose the high fixed cost alternative to maximize pretax operating cash flow? A) 320 units B) 352 units C) 3200 units D) 500 units

Q: AchtTre has found that its pretax operating cash flow basis break-even number of glasses sold is 550,000 pairs. If each pair is sold for $15 and the variable cost per unit is $10, then what is the amount of AchtTre's fixed costs? A) $887,000 B) $1,558,000 C) $2,750,000 D) $1,582,000

Q: SileCuatro has produced 22,000 tins in a year. The pretax operating cash flow (EBITDA) break-even point is 22,000 tins. If the fixed costs for the product is $1,500,000 and the variable cost per tin is $298, then what price can SileCuatro charge per tin if the firm needs to break even on a pretax operating cash flow basis? (Round to nearest whole dollar.) A) $366 B) $298 C) $268 D) $372

Q: Treguard Inc. has total fixed costs of $8,500 per month. It sells rib plates for $15 each and the variable cost of providing each plate is $10. What is the pretax operating cash flow break-even point for Treguard?A) 567 platesB) 1,700 platesC) 1,900 platesD) 1,622 plates

Q: Silevector has a degree of pretax cash flow operating leverage equal to 1.341. If the firm's EBITDA was $2,500 last year while its depreciation and amortization expense was $200 in the same year, then what was the firm's degree of accounting operating leverage? (Do not round the intermediate calculations. Round your final answer to two decimal places) A) 2.54 B) 1.96 C) 1.46 D) 2.39

Q: Resoneffect Inc. has a degree of pretax cash flow operating leverage equal to 1.12. If the firm's EBITDA was $2,000 last year while its depreciation and amortization expense was $150 in the same year, then what was the firm's degree of accounting operating leverage? (Round the final answer to two decimal places.)A) 1.09B) 1.21C) 2.09D) 2.18

Q: Ergotone Audio had a degree of accounting operating leverage equal to 1.60 during the most recent period. If the firm's EBITDA was $3,000 and its fixed costs were equal to $1,250, then what was Ergotone 's depreciation and amortization expense during the same period?(Round the final answer to the nearest whole dollar.)A) $344B) $507C) $377D) $404

Q: Metkia Inc. had a degree of accounting operating leverage equal to 1.841 during the most recent period. If the firm's EBITDA was $4,800 and depreciation and amortization was equal to$600, then what was Metkia's fixed cash expenses during the same period?(Round your answer to the nearest whole dollar.)A) $1,548B) $2,932C) $2,324D) $2,886

Q: Dupaudio Inc. had EBITDA of $3,000 and EBIT of $2,750, with fixed cash expense of $600 last year. What was Dupaudio's degree of accounting operating leverage? A) 1.20 B) 1.25 C) 1.28 D) 1.31

Q: Mussubsound Audotec Inc. had EBIT of $1,850 last year with fixed costs equal to $500 (depreciation and amortization not included) and depreciation and amortization equal to $150. What was Mussubsound Audotec's degree of accounting operating leverage? A) 1.25 B) 1.35 C) 1.38 D) 1.40

Q: Synthgration has a degree of pretax cash flow operating leverage equal to 1.266. If the firm's EBITDA was $1,500 last year while its depreciation and amortization expense was $100 in the same year, then what was the firm's degree of accounting operating leverage?A) 1.29B) 1.33C) 1.36D) 1.39

Q: Oeta Works has a degree of pretax cash flow operating leverage of 1.25. If the firm's EBITDA was $1,000 last year while its depreciation and amortization expense was $50 in the same year, then what was the firm's degree of accounting operating leverage?A) 1.26B) 1.30C) 1.32D) 1.35

Q: Sparran Crafthad sales of $2.24 million last year for which the total cost was $2 million. If the firm had fixed costs of $600,000 on sales of 56,000 books, then what is the firm's per-unit contribution? (Round the final answer to the nearest whole dollar.) A) $20.00 B) $19.00 C) $15.00 D) $10.00

Q: Which of the following mathematical expressions is used to calculate the degree of accounting operating leverage? A) 1 + (FC / EBITDA) B) 1 + (FC / EBIT) C) 1 + [(FC + Depreciation and Amortization) / EBITDA] D) 1 + [(FC + Depreciation and Amortization) / EBIT]

Q: An analytical method that uses a computer to quickly examine a large number of scenarios and obtain probability estimates for various values in a financial analysis is known as: A) risk analysis. B) credit analysis. C) capital structure analysis. D) simulation analysis.

Q: A change in sales price of a product sold by a firm will probably involve a reduction in the number of units sold, as well as the possibility of a change in the cost structure of the firm's product in question. If a firm were interested in the entire price change effect on the NPV of a project, then it would be interested in: A) sensitivity analysis. B) scenario analysis. C) simulation analysis. D) contribution analysis.

Q: Which of the following project risk analyses is best able to analyze the effect of a single set of circumstances, with correlated inputs, on the NPV of a project? A) Sensitivity analysis. B) Scenario analysis. C) Simulation analysis. D) Contribution analysis.

Q: Which of the following project risk analyses is best able to analyze the effect of a single input, uncorrelated with other inputs, on the NPV of a project? A) Sensitivity analysis B) Scenario analysis C) Simulation analysis D) Horizontal analysis

Q: Which of the following mathematical expressions is used to calculate the degree of pretax cash flow operating leverage? A) 1 + (FC / EBITDA) B) 1 + (FC / EBIT) C) 1 + [(FC + Depreciation and Amortization) / EBITDA] D) 1 + [(FC + Depreciation and Amortization) / EBIT]

Q: If a firm is interested in the distribution of the NPV for a project that it is considering, then the firm should be most interested in: A) a sensitivity analysis. B) a scenario analysis. C) a simulation analysis. D) a horizontal analysis.

Q: Ottomony has analyzed a new type of all-in-one retail center where the NPV of the project has an expected value with a distribution that yields a standard deviation of $25 million. Ottomony came to this conclusion by analyzing the individual input distributions for the project. This analysis is called: A) a sensitivity analysis. B) a scenario analysis. C) a simulation analysis. D) a horizontal analysis.

Q: An analysis in which each of the inputs and assumptions for a project takes on a separate assumed distribution whereby a computer draws on each of those input and assumption distributions to create a distribution for the NPV of the entire project is called: A) a sensitivity analysis. B) a scenario analysis. C) a simulation analysis. D) a horizontal analysis.

Q: If a project holds an 80 percent probability of high demand and a 20 percent probability of low demand, then the expected value of the net present value of the two different demand assumptions would give us a weighted average net present value for the project. Such an analysis is called: A) a sensitivity analysis. B) a scenario analysis. C) a simulation analysis. D) a horizontal analysis.

Q: Scenario analysis can help a firm to: A) understand the degree of uncertainty that a different set of project-affecting circumstances may hold. B) eliminate all of the uncertainty that a different set of project-affecting circumstances may hold. C) transform a risky project into a risk-free project. D) understand the degree of certainty that a similar set of project-affecting circumstances may hold.

Q: A firm is considering two distinct set of circumstances that assume high inflation and low inflation. In the high inflationary set of circumstances, the price per unit will be affected as well as the variable and fixed costs. If the low-inflation set of circumstances is considered the baseline, then the analysis concerning the high inflationary circumstances could be considered: A) a sensitivity analysis. B) a scenario analysis. C) a Monte Carlo simulation. D) a horizontal analysis.

Q: At times, when a firm is considering an alternative such that a set of variables affecting a project are interrelated, then analysis that considers this interrelation could be performed. This is called: A) a sensitivity analysis. B) a scenario analysis. C) a Monte Carlo simulation. D) a horizontal analysis.

Q: If a firm wanted to find the effect of a change in the variable cost per unit of production on the net present value of a project, then the firm might perform: A) a sensitivity analysis. B) a scenario analysis. C) a Monte Carlo simulation. D) a cash flow simulation.

Q: If a firm were interested in knowing the effect of a single input change on the net present value of a project, then the firm would most likely want to perform: A) a Monte Carlo simulation. B) a scenario analysis. C) a sensitivity analysis. D) a break-even analysis.

Q: Astroscope Tours finds that if it were to increase its price by 10 percent, it would have a 6 percent reduction in the NPV of its new 3-Hour Tour. Considering other things to be unchanged, Astroscope's analysis could be described as: A) Monte Carlo simulation. B) break-even analysis. C) sensitivity analysis. D) variance analysis.

Q: Sancore Inc. decided to invest in a project costing $35,000. It is assumed that all of $8,000 working capital will be recovered at the end of the project, which is four years. The opportunity cost of capital is 10%. Compute the present value of net non-recurring investment of the project. (Do not round intermediate calculation. Round the final answer to the nearest dollar.) A) $36,713 B) $45,657 C) $46,713 D) $35,657

Q: Which of the following statements is true of the economic break-even point? A) It is the number of units that must be sold for accounting operating profit to equal $0. B) It is the level of unit sales at which cash flows or profitability for one project alternative switches from being lower than that of another alternative to being higher. C) It is the number of units that must be sold each year during the life of a project so that the NPV of a project equals $0. D) It is the number of units that must be sold for pretax operating cash flow to be $0.

Q: The difference between revenue and variable cost is called: A) total contribution. B) net profit. C) EBIT. D) EAT.

Q: The economic break-even point is the number of units that must be sold each year over the life of a project in order for the NPV of that project to equal to _____. A) $0 B) $1 C) the present value of cash inflows D) the present value of investment

Q: Which of the following differentiates accounting operating profit break-even point from pre-tax operating cash flow break-even point? A) Accounting operating profit break-even point includes interest expense in the numerator, whereas pre-tax operating cash flow does not. B) Pre-tax operating cash flow break-even point includes income taxes in the denominator, whereas accounting operating profit break-even point does not. C) Accounting operating profit break-even point includes depreciation & amortization in the numerator, whereas pre-tax operating cash flow does not. D) Pre-tax operating cash flow break-even point includes interest expense in the numerator, whereas accounting operating profit break-even point does not.

Q: Which is the term used to define how many units must be sold for pre-tax operating cash flow to be equal to zero? A) Pre-tax accounting operating profit break-even point B) Pre-tax operating financial leverage break-even point C) Pre-tax accounting sensitivity break-even point D) Pre-tax operating cash flow break-even point

Q: The higher a project's operating leverage, _____. A) the lower the sensitivity of EBIT to changes in revenue B) the greater the sensitivity of EBITDA to changes in revenue C) the lower the sensitivity of net profit to changes in variable costs D) the greater the sensitivity of net profit to changes in variable costs

Q: Which of the following statements is true? A) The degree of pretax cash flow operating leverage remains same for any level of revenue. B) The higher the proportion of fixed costs to variable costs in a project, the greater the sensitivity of pre-tax operating cash flows to changes in revenue. C) Depreciation and amortization are deducted to get pretax operating cash flows. D) The lower the proportion of fixed costs to variable costs in a project, the more pre-tax operating cash flows will vary as revenue varies.

Q: If the degree of accounting operating leverage is 1.3 for a firm, then a 10 percent increase in revenue should drive a: A) 12% increase in pretax operating cash flows. B) 13% increase in EBIT. C) 30% increase in EBIT. D) 1.3% increase in pretax operating cash flows.

Q: Depreciation and amortization are treated like fixed costs: A) in the calculation of the degree of pretax cash flow operating leverage. B) in the calculation of the degree of accounting operating leverage. C) for cash flow purposes. D) for computing dividend.

Q: _____ is a measure of the sensitivity of EBITDA or EBIT to changes in revenue. A) Total leverage B) Financial leverage C) Operating leverage D) Combined leverage

Q: The degree of pretax cash flow operating leverage provides us with: A) a measure of how sensitive pretax operating cash flows are to changes in revenue. B) a measure of how sensitive accounting operating profits are to changes in revenue. C) a measure of how sensitive NOPAT is to changes in tax rates. D) a measure of how sensitive accounting operating profits are to changes in tax rates.

Q: If a firm is about to operate in an environment in which there will be a great deal of variability in the level of revenues, then the firm: A) should structure its cost structure to have high fixed costs and higher total variable costs. B) should structure its cost structure to have high fixed costs and consequently lower per unit variable costs. C) should structure its cost structure to have low fixed costs and consequently higher per unit variable costs. D) should leave the cost structure unchanged.

Q: Compared to an identical project with a lower proportion of fixed costs, a project with a higher proportion of fixed costs will have: A) a higher degree of sensitivity of EBITDA to a change in revenues. B) a lower degree of sensitivity of EBITDA to a change in revenues. C) no discernible difference of a change in sensitivity of EBITDA to a change in revenues. D) a stable net income stream as a function of revenues.

Q: Another name for EBITDA is: A) pretax operating cash flow. B) accounting operating cash flow. C) net income before tax. D) net income after tax.

Q: Revenue minus variable and fixed costs best describes: A) EBIT. B) EBITDA. C) NOPAT. D) EAT.

Q: EBITDA stands for: A) earnings before interest, taxes, and amortized depreciation. B) earnings before interest, taxes, depreciation, and amortization. C) earnings before interest and taxes. D) earnings before interest, taxes, dividend, and accrued expenses.

Q: The economic break-even point focuses on the after-tax free cash flows associated with the project for its entire life. A) True B) False

Q: Sensitivity analysis involves examining the sensitivity of the output from an analysis, such as the NPV to changes in individual assumptions. A) True B) False

Q: Simulation analysis has the benefit of providing a pinpoint accurate forecast of a project's NPV. A) True B) False

Q: Within a simulation analysis, the firm will need to come up with some distributional assumptions concerning the forecast inputs, such as the mean and variance of the sales forecast. A) True B) False

Q: If a firm knows that a price change will have an effect on a number of other forecast variables, such as the sales forecast, then the firm might require scenario analysis rather than sensitivity analysis. A) True B) False

Q: An analysis in which a firm would like to know the effect of a price change on the NPV of a project, holding all other variables and forecasts constant, is one type of sensitivity analysis. A) True B) False

Q: The NPV of a project will equal $0 when the present value of the annual FCFs from the project, PV (FCF), equals the present value of net nonrecurring investments. A) True B) False

Q: The economic break-even point focuses on the cash flows or profits from operations rather than after-tax free cash flows associated with the project. A) True B) False

Q: The economic break-even point considers a single year rather than the entire life. A) True B) False

Q: An economic break-even point is the number of units that must be sold each year during the life of the project so that the difference of present value of cash inflows and present value of cash outflows is one. A) True B) False

Q: The accounting operating profit break-even points are smaller than the corresponding pretax operating cash flow break-even points for a project with positive costs. A) True B) False

Q: The accounting operating profit (EBIT) break-even point tells us how many units must be sold to avoid an accounting operating loss. A) True B) False

Q: The crossover level of unit sales can be calculated for any two alternatives that have the same level of operating leverage. A) True B) False

Q: The crossover level of unit sales is the level at which one fixed/variable cost combination of production will begin to generate higher levels of operating cash flows than another fixed/variable cost combination of production. A) True B) False

Q: The per-unit contribution margin is defined as the total sales price less its total variable cost. A) True B) False

Q: The pretax operating cash flow (EBITDA) break-even point is determined by how many units will have to be sold in order to cover the firms fixed cash expenses. A) True B) False

Q: If a project fails to break even from a pretax operating cash flow perspective, then the firm is going to put more cash into the project to keep it going. A) True B) False

Q: Break-even analysis tells us how many units must be sold in order for a project to break even on a cash flow or an accounting basis. A) True B) False

Q: An increase in the proportion of a project's costs that are fixed will increase the degree of operating leverage for the project. A) True B) False

Q: A firm that has zero fixed costs will have a degree of cash flow operating leverage equal to one. A) True B) False

Q: Operating profits and operating cash flow describe the same item. A) True B) False

Q: If there is no uncertainty regarding costs, volatility in pretax operating cash flows and accounting operating profits will be driven entirely by changes in revenue and operating leverage. A) True B) False

Q: Taxes do not enter into the equation for the degree of cash flow of operating leverage because both fixed costs and pretax operating cash flows are measured on a pretax basis. A) True B) False

Q: If The Tower of Pizza has a cash flow degree of operating leverage equal to 1.15, then a 20 percent increase in revenue should drive a 35 percent increase in pretax operating cash flow. A) True B) False

Q: If Tunemony Craft had an increase in EBIT of 24 percent with an degree of accounting operating leverage of 1.2, then the firm must have had a 20 percent increase in revenue if no other changes were involved. A) True B) False

Q: If a firm's degree of accounting operating leverage is 1.12, a 10 percent increase in revenue should result in a 12.0 percent increase in EBIT. A) True B) False

Q: The degree of pretax cash flow operating leverage will change for different levels of revenue. A) True B) False