Corporate Finance Canadian 7th Edition Jaffe Test Bank

Corporate Finance Canadian 7th
Edition Jaffe Test Bank

Visit to Download in Full: https://testbankdeal.com/download/corporate-finance-canadi
an-7th-edition-jaffe-test-bank/
Chapter 09 Risk Analysis, Real Options, and Capital
Budgeting
Student: ___________________________________________________________________________
1. In order to make a decision with a decision tree:
A. one starts furthest out in time to make the first decision.

B. One one must begin at time 0.
C. Any any path can be taken to get to the end.
D. Any any path can be taken to get back to the beginning.
2. 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
3. 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.
4. Sensitivity analysis helps you determine the:
A. range of possible outcomes given possible ranges for every variable.

B. degree to which the net present value reacts to changes in a single variable.
C. net present value given the best and the worst possible situations.
D. degree to which a project is reliant upon the fixed costs.
5. As the degree of sensitivity of a project to a single variable rises, the:
A. lower the forecasting risk of the project.

B. smaller the range of possible outcomes given a pre-defined range of values for the input.
C. more attention management should place on accurately forecasting the future value of that
variable.
D. lower the maximum potential value of the project.
6. The sales level that results in a project's net income exactly equaling zero is called the _____
break-even.
A. operational
B. leveraged
C. accounting
D. cash
E. present value
7. The sales level that results in a project's net present value exactly equaling zero is called the
_____ break-even.
A. operational
B. leveraged
C. accounting
D. cash
E. present value
8. 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.
9. An investigation of the degree to which NPV depends on assumptions made about critical
variables is called a(n)
A. operating analysis.
B. sensitivity analysis.
C. marginal benefit analysis.
D. decision tree analysis.
10. 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.
11. 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.
12. 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.
13. 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.
14. The Mini-Max Company has the following cost information on their new prospective project.
Fixed costs are $200/year. (Initial investment is $700).

Variable costs: $3/unit.
Depreciation: $140/year.
Price: $8/unit.
Discount rate: 12%.
Project life: 5 years.
Tax rate: 34%.
Calculate the accounting break-even point.
A. 68.00 units/year.
B. 103.03 units/year.
C. 113.33 units/year.
D. 25.00 units/year.

Price: $8/unit.
Discount rate: 12%.
Tax rate: 34%.
Calculate the present value break-even point.
D. 75 units/year.
16. The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give or
take 10%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500.
Cost estimates are considered accurate within a plus or minus 5% range. The depreciation
expense is $4,000. The sale price is estimated at $16 a unit, give or take 2%. The company
bases its sensitivity analysis on the expected case scenario
What is the sales revenue under the optimistic case scenario?
A. $40,000
B. $43,120
C. $44,000
D. $44,880
E. $48,400
bases its sensitivity analysis on the expected case scenario
What is the contribution margin under the expected case scenario?
A. $2.67
B. $3.00
C. $7.92
D. $8.00
E. $8.72
take 10%. The expected variable cost per unit is $8 and the expected fixed costs are $12,500
(including depreciation). Cost estimates are considered accurate within a plus or minus 5%
range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take
2%. The company bases its sensitivity analysis on the expected case scenario
What is the amount of the fixed cost per unit under the pessimistic case scenario?
A. $4.55
B. $5.00
C. $5.83
D. $6.02
E. $6.55
bases its sensitivity analysis on the expected case scenario.
The company is conducting a sensitivity analysis on the sales price using a sales price estimate
of $17. Using this value, the earnings before interest and taxes will be:
A. $4,000.
B. $6,000.
C. $8,500.
D. $10,000.
E. $18,500.
bases its sensitivity analysis on the expected case scenario.
The company conducts a sensitivity analysis using a variable cost of $9. The total variable cost
estimate will be:
A. $21,375.
B. $22,500.
C. $23,625.
D. $24,125.
E. $24,750.
21. From the information below, calculate the accounting break-even point.
Fixed costs are $2,000/year. (Initial investment is $2,000.)

Price: $20/unit.
Discount rate: 10%.
Tax rate: 34%.
A. 88 units/year.
B. 161 units/year.
C. 143 units/year.
D. 100 units/year.
22. Given the following information, calculate the present value break-even point.
Fixed costs: $2000/year. (Initial investment $2000).

Price: $20/unit.
Discount rate: 10%.
Tax rate: 34%.
A. 100 units/year.
B. 143 units/year.
C. 202 units/year.
D. 286 units/year.
23. Including the option to expand in your project analysis will tend to:
A. extend the duration of a project but not affect the project's net present value.
B. increase the net present value of a project.
C. decrease the net present value of a project.
D. have no effect on either a project's cash flows or its net present value.
24. All else equal, the contribution margin must increase as:
A. both the sales price and variable cost per unit increase.
B. the fixed cost per unit declines.
C. the variable cost per unit declines.
D. sales price per unit declines.
E. the sales price minus the fixed cost per unit increases.
25. All else constant, as the variable cost per unit increases, the:
A. contribution margin decreases.

B. sensitivity to fixed costs decreases.
C. degree of operating leverage decreases.
D. operating cash flow increases.
E. net profit increases.
26. The Marx Brewing Company recently installed a new bottling machine. The machine's initial cost
is $2,000, and can be depreciated on a straight line basis to a zero salvage in 5 years. The
machine's per year fixed cost is $1,800, and its variable cost is $0.50 per unit. The selling price
per unit is $1.50. Marx's tax rate is 34%, and it uses a 16% discount rate. Calculate the
accounting break-even point on the new machine, as well as the present value break-even point
on the new machine.
27. The Marx Brewing Company recently installed a new bottling machine. The machine's initial cost
is $2,000, and can be depreciated on a straight line basis to a zero salvage in 5 years. The
machine's per year fixed cost is $1,800, and its variable cost is $0.50 per unit. The selling price
per unit is $1.50. Marx's tax rate is 34%, and it uses a 16% discount rate. If Marx sells 2500 units
what is the accounting profit and contribution margin for Marx Brewing?
28. From the information below, calculate the impact of discount rate changes on the present-value
break-even point. Fixed costs are $2500/year. (Initial investment is $2000.)

Price: $25/unit.
Initial Discount rate: 10%.
Tax rate: 34%.
If the discount rate were 15% and 5% what would be the present-value break-even points. How
sensitive is the break-even to the discount rate change (show your results).
29. Your company has a new project to be considered. You are given the following information on the
best guess of related outcomes for the project. The cost of developing and market testing the
product over the next year is $225 million. If the test is successful, which has a 65% chance, the
company will spend another $800 million to put the productive capabilities in place. The expected
cashflows after tax for a successful project are $225 million each year for the next six years with a
probability of .8; there is a 20% chance of a zero NPV. If the test fails the cashflows associated
with continuing through the sixth year is $125 million per year after tax. The company uses a 12%
discount rate for these types of projects. Draw and label the decision tree. Explain what decisions
management would make at each node upon their realization.
30. Your company has a new project to be considered. You are given the following information on the
best guess of related outcomes for the project. The cost of developing and market testing the
product over the next year is $225 million. If the test is successful, which is expected to be 65%,
the company will spend another $800 million to put the productive capabilities in place. The
expected cashflows after tax for a successful project are $225 million each year for the next six
years with a probability of .8; there is a 20% chance of a zero NPV. If the tests fail the cashflows
associated with continuing through the sixth year is $125 million per year after tax. The company
uses a 12% discount rate for these types of projects. Determine the net present value if the tests
are a success. Determine the net present value and the decision to undertake testing or not.
31. Sensitivity analysis is a method which allows for evaluation of the NPV given a series of changes
to the underlying assumptions. Discuss why and how scenario analysis is used in addition to
sensitivity analysis.
32. The market value of an investment project should be viewed as the sum of the standard NPV and
the value of managerial options. Explain two different options that management may have, what
they are, and how they would influence market value.
33. Consider the following statement by a project analyst: "I analyzed my project using scenarios for
the base case, best case, and worst case. I computed break-evens and degrees of operating
leverage. I did sensitivity analysis and simulation analysis. I computed NPV, IRR, payback, AAR,
and PI. In the end, I have over a hundred different estimates and am more confused than ever. I
would have been better off just sticking with my first estimate and going by my gut reaction."
Critique this statement.
Budgeting Key
1. In order to make a decision with a decision tree:
A. one starts furthest out in time to make the first decision.

B. One one must begin at time 0.
C. Any any path can be taken to get to the end.
D. Any any path can be taken to get back to the beginning.
Accessibility: Keyboard Navigation
Difficulty: Medium
Learning Objective: 09-01 Decision Trees
Ross - Chapter 09 #1
2. 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
Difficulty: Hard
3. 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.
Difficulty: Medium
4. Sensitivity analysis helps you determine the:
A. range of possible outcomes given possible ranges for every variable.

B. degree to which the net present value reacts to changes in a single variable.
C. net present value given the best and the worst possible situations.
D. degree to which a project is reliant upon the fixed costs.
Difficulty: Easy
Learning Objective: 09-02 Sensitivity Analysis; Scenario Analysis; and Break-Even Analysis
5. As the degree of sensitivity of a project to a single variable rises, the:
A. lower the forecasting risk of the project.

B. smaller the range of possible outcomes given a pre-defined range of values for the input.
C. more attention management should place on accurately forecasting the future value of that
variable.
D. lower the maximum potential value of the project.
Difficulty: Medium
6. The sales level that results in a project's net income exactly equaling zero is called the _____
break-even.
A. operational
B. leveraged
C. accounting
D. cash
E. present value
Difficulty: Medium
7. The sales level that results in a project's net present value exactly equaling zero is called the
_____ break-even.
A. operational
B. leveraged
C. accounting
D. cash
E. present value
Difficulty: Medium
8. 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.
Difficulty: Easy
9. An investigation of the degree to which NPV depends on assumptions made about critical
variables is called a(n)
A. operating analysis.
B. sensitivity analysis.
C. marginal benefit analysis.
D. decision tree analysis.
Difficulty: Easy
10. 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.
Difficulty: Medium
11. 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.
Difficulty: Easy
12. 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.
Difficulty: Hard
13. 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.
Difficulty: Hard

Price: $8/unit.
Discount rate: 12%.
Tax rate: 34%.
Calculate the accounting break-even point.
D. 25.00 units/year.
Difficulty: Medium

Price: $8/unit.
Discount rate: 12%.
Tax rate: 34%.
Calculate the present value break-even point.
D. 75 units/year.
Difficulty: Medium
16. The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give
or take 10%. The expected variable cost per unit is $8 and the expected fixed costs are
$12,500. Cost estimates are considered accurate within a plus or minus 5% range. The
depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take 2%. The
company bases its sensitivity analysis on the expected case scenario
What is the sales revenue under the optimistic case scenario?
A. $40,000
B. $43,120
C. $44,000
D. $44,880
E. $48,400
Difficulty: Medium
company bases its sensitivity analysis on the expected case scenario
What is the contribution margin under the expected case scenario?
A. $2.67
B. $3.00
C. $7.92
D. $8.00
E. $8.72
Difficulty: Medium
$12,500 (including depreciation). Cost estimates are considered accurate within a plus or
minus 5% range. The depreciation expense is $4,000. The sale price is estimated at $16 a
unit, give or take 2%. The company bases its sensitivity analysis on the expected case
scenario
What is the amount of the fixed cost per unit under the pessimistic case scenario?
A. $4.55
B. $5.00
C. $5.83
D. $6.02
E. $6.55
Difficulty: Medium
company bases its sensitivity analysis on the expected case scenario.
The company is conducting a sensitivity analysis on the sales price using a sales price
estimate of $17. Using this value, the earnings before interest and taxes will be:
A. $4,000.
B. $6,000.
C. $8,500.
D. $10,000.
E. $18,500.
Difficulty: Medium
company bases its sensitivity analysis on the expected case scenario.
The company conducts a sensitivity analysis using a variable cost of $9. The total variable
cost estimate will be:
A. $21,375.
B. $22,500.
C. $23,625.
D. $24,125.
E. $24,750.
Difficulty: Medium
21. From the information below, calculate the accounting break-even point.
Fixed costs are $2,000/year. (Initial investment is $2,000.)

Price: $20/unit.
Discount rate: 10%.
Tax rate: 34%.
A. 88 units/year.
B. 161 units/year.
C. 143 units/year.
D. 100 units/year.
Difficulty: Medium
22. Given the following information, calculate the present value break-even point.
Fixed costs: $2000/year. (Initial investment $2000).

Price: $20/unit.
Discount rate: 10%.
Tax rate: 34%.
A. 100 units/year.
B. 143 units/year.
C. 202 units/year.
D. 286 units/year.
Difficulty: Medium
23. Including the option to expand in your project analysis will tend to:
A. extend the duration of a project but not affect the project's net present value.
B. increase the net present value of a project.
C. decrease the net present value of a project.
D. have no effect on either a project's cash flows or its net present value.
Difficulty: Medium
Learning Objective: 09-04 Real Options
24. All else equal, the contribution margin must increase as:
A. both the sales price and variable cost per unit increase.
B. the fixed cost per unit declines.
C. the variable cost per unit declines.
D. sales price per unit declines.
E. the sales price minus the fixed cost per unit increases.
Difficulty: Medium
25. All else constant, as the variable cost per unit increases, the:
A. contribution margin decreases.

B. sensitivity to fixed costs decreases.
C. degree of operating leverage decreases.
D. operating cash flow increases.
E. net profit increases.
Difficulty: Medium
26. The Marx Brewing Company recently installed a new bottling machine. The machine's initial
cost is $2,000, and can be depreciated on a straight line basis to a zero salvage in 5 years.
The machine's per year fixed cost is $1,800, and its variable cost is $0.50 per unit. The selling
price per unit is $1.50. Marx's tax rate is 34%, and it uses a 16% discount rate. Calculate the
accounting break-even point on the new machine, as well as the present value break-even
point on the new machine.
Accounting break-even is:
($1,800 + $400)/($1.50 - $0.5)(1 - .34) = 2,200 units.
Present value break-even is:
$610.81 + $1,800(1 - .34) - $400(.34)/($1)(1 - .34) = 2,519 units.
Difficulty: Medium
27. The Marx Brewing Company recently installed a new bottling machine. The machine's initial
cost is $2,000, and can be depreciated on a straight line basis to a zero salvage in 5 years.
The machine's per year fixed cost is $1,800, and its variable cost is $0.50 per unit. The selling
price per unit is $1.50. Marx's tax rate is 34%, and it uses a 16% discount rate. If Marx sells
2500 units what is the accounting profit and contribution margin for Marx Brewing?
Difficulty: Medium
28. From the information below, calculate the impact of discount rate changes on the present-
value break-even point. Fixed costs are $2500/year. (Initial investment is $2000.)

Price: $25/unit.
Initial Discount rate: 10%.
Tax rate: 34%.
If the discount rate were 15% and 5% what would be the present-value break-even points.
How sensitive is the break-even to the discount rate change (show your results).
PV Break-even (10%) = 630.94 + (2500(.66) - 500(.34))/(25 - 8)(.66)

= 188.14 (EAC @ 10% = 630.94).
PV Break-even (15%) = 700.53 + (2500(.66) - 500(.34))/(25 - 8)(.66) = 194.34.
PV Break-even (5%) = 564.02 + (2500(.66) - 500(.34))/(25 - 8)(.66) = 182.17.
Not very sensitive; a 50% increase or decrease in the discount rate causes only a 3.3%
increase in break-even units or a 3.2% decrease in break-even units necessary respectively.
Difficulty: Hard
29. Your company has a new project to be considered. You are given the following information on
the best guess of related outcomes for the project. The cost of developing and market testing
the product over the next year is $225 million. If the test is successful, which has a 65%
chance, the company will spend another $800 million to put the productive capabilities in
place. The expected cashflows after tax for a successful project are $225 million each year for
the next six years with a probability of .8; there is a 20% chance of a zero NPV. If the test fails
the cashflows associated with continuing through the sixth year is $125 million per year after
tax. The company uses a 12% discount rate for these types of projects. Draw and label the
decision tree. Explain what decisions management would make at each node upon their
realization.
See page 277 for example diagram
Difficulty: Hard
30. Your company has a new project to be considered. You are given the following information on
the best guess of related outcomes for the project. The cost of developing and market testing
the product over the next year is $225 million. If the test is successful, which is expected to be
65%, the company will spend another $800 million to put the productive capabilities in place.
The expected cashflows after tax for a successful project are $225 million each year for the
next six years with a probability of .8; there is a 20% chance of a zero NPV. If the tests fail the
cashflows associated with continuing through the sixth year is $125 million per year after tax.
The company uses a 12% discount rate for these types of projects. Determine the net present
value if the tests are a success. Determine the net present value and the decision to
undertake testing or not.
NPV1 = Pr[Cost + CFAT * A.12,6] = .65{[-800 + (225)4.1114].8 + .2(0)} = .65(100.52) = 65.34

NPV0 = -225 + 65.34/1.12 = -166.66; Do not invest.
Difficulty: Hard
31. Sensitivity analysis is a method which allows for evaluation of the NPV given a series of
changes to the underlying assumptions. Discuss why and how scenario analysis is used in
addition to sensitivity analysis.
Sensitivity analysis:
measures input of changing one input at a time.

variables may change simultaneously in reality.
estimates may be overly optimistic or pessimistic.
Scenario analysis:
a variant of sensitivity analysis.

allows for multiple factor influences.
examines a number of different scenarios.
minimizes the false sense of security that may come from sensitivity analysis.
Difficulty: Medium
32. The market value of an investment project should be viewed as the sum of the standard NPV
and the value of managerial options. Explain two different options that management may have,
what they are, and how they would influence market value.
To expand project - favorable market reaction

Contract business - under conditions of poor demand, etc.
Abandonment, equipment replacement, opening and closing facilities.
Difficulty: Easy
33. Consider the following statement by a project analyst: "I analyzed my project using scenarios
for the base case, best case, and worst case. I computed break-evens and degrees of
operating leverage. I did sensitivity analysis and simulation analysis. I computed NPV, IRR,
payback, AAR, and PI. In the end, I have over a hundred different estimates and am more
confused than ever. I would have been better off just sticking with my first estimate and going
by my gut reaction." Critique this statement.
The goal of evaluating an NPV estimate or other decision criteria is to determine the
reasonableness of it. If done properly, the added analysis will heighten either the degree of
comfort or the degree of discomfort about a project. Ultimately, this type of analysis reveals
both the weaknesses and the strengths of a project. Furthermore, it helps isolate potential
trouble areas and sharpens the focus on which variables are most crucial for forecasting. The
very nature of the process still leaves a great deal of uncertainty even after all of the analysis
is complete. However, in the end, the analyst should be better informed and more comfortable
in making a decision, not less so.
Difficulty: Hard
Budgeting Summary
Category # of Questions
Accessibility: Keyboard Navigation 25
Difficulty: Easy 5
Difficulty: Hard 7
Difficulty: Medium 21
Learning Objective: 09-01 Decision Trees 3
Learning Objective: 09-02 Sensitivity Analysis; Scenario Analysis; and Break-Even Analysis 26
Learning Objective: 09-04 Real Options 4
Ross - Chapter 09 33

Corporate Finance Canadian 7th Edition Jaffe Test Bank

Uploaded by

Copyright:

Available Formats

You might also like

Corporate Finance Canadian 7th Edition Jaffe Test Bank

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Corporate Finance Canadian 7th Edition Jaffe Test Bank

Uploaded by

Copyright:

Available Formats

Corporate Finance Canadian 7th

Edition Jaffe Test Bank

1. In order to make a decision with a decision tree:

A. one starts furthest out in time to make the first decision.

A. only the cash flows from successful path.

4. Sensitivity analysis helps you determine the:

A. range of possible outcomes given possible ranges for every variable.

A. lower the forecasting risk of the project.

8. Fixed production costs are:

A. directly related to labor costs.

A. as no economic forecasts are changed.

11. The accounting profit break-even point occurs when:

A. the total revenue curve cuts the total cost curve.

12. In the present-value break-even the EAC is used to:

A. determine the opportunity cost of investment.

A. present value break-even is more complicated to calculate.

Fixed costs are $200/year. (Initial investment is $700).

Calculate the accounting break-even point.

Fixed costs are $200/year. (Initial investment is $700).

Calculate the present value break-even point.

Fixed costs are $2,000/year. (Initial investment is $2,000.)

Fixed costs: $2000/year. (Initial investment $2000).

A. contribution margin decreases.

Variable costs: $8/unit.

1. In order to make a decision with a decision tree:

A. one starts furthest out in time to make the first decision.

A. only the cash flows from successful path.

A. range of possible outcomes given possible ranges for every variable.

5. As the degree of sensitivity of a project to a single variable rises, the:

A. lower the forecasting risk of the project.

8. Fixed production costs are:

A. directly related to labor costs.

10. Scenario analysis is different than sensitivity analysis:

A. as no economic forecasts are changed.

11. The accounting profit break-even point occurs when:

A. the total revenue curve cuts the total cost curve.

12. In the present-value break-even the EAC is used to:

A. determine the opportunity cost of investment.

A. present value break-even is more complicated to calculate.

Fixed costs are $200/year. (Initial investment is $700).

Calculate the accounting break-even point.

Fixed costs are $200/year. (Initial investment is $700).

Calculate the present value break-even point.

Fixed costs are $2,000/year. (Initial investment is $2,000.)

Fixed costs: $2000/year. (Initial investment $2000).

A. contribution margin decreases.

Accounting break-even is:

($1,800 + $400)/($1.50 - $0.5)(1 - .34) = 2,200 units.

Present value break-even is:

$610.81 + $1,800(1 - .34) - $400(.34)/($1)(1 - .34) = 2,519 units.

Variable costs: $8/unit.

PV Break-even (10%) = 630.94 + (2500(.66) - 500(.34))/(25 - 8)(.66)

See page 277 for example diagram

NPV1 = Pr[Cost + CFAT * A.12,6] = .65{[-800 + (225)4.1114].8 + .2(0)} = .65(100.52) = 65.34

measures input of changing one input at a time.

a variant of sensitivity analysis.

To expand project - favorable market reaction

You might also like