Test bank corporate finance 8e ros chap011

Chapter 011 Project Analysis and Evaluation Multiple Choice Questions Forecasting risk is defined as the: a possibility that some proposed projects will be rejected b process of estimating future cash flows relative to a project C possibility that errors in projected cash flows will lead to incorrect decisions d process of ascertaining the incremental cash flows for a project e possibility that tax rates could change over the life of a project SECTION: 11.1 TOPIC: FORECASTING RISK TYPE: DEFINITIONS Scenario analysis is defined as: a the determination of the most likely outcome for a project B analyzing the changes in NPV estimates when what-if questions are posed c isolating the effect that one variable has on the NPV of a project d comparing the NPV of a project both with and without considering the effects of erosion e determining the acceptability of a project based solely on the project's operating cash flows SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: DEFINITIONS An analysis of what happens to the estimate of net present value when only one variable is changed is called _ analysis a forecasting b scenario C sensitivity d simulation e break-even SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: DEFINITIONS 11-1 Chapter 011 Project Analysis and Evaluation An analysis which combines scenario analysis with sensitivity analysis is called _ analysis a forecasting b scenario c sensitivity D simulation e break-even SECTION: 11.2 TOPIC: SIMULATION ANALYSIS TYPE: DEFINITIONS Variable costs: A change in direct relationship to the quantity of output produced b are constant in the short-run regardless of the quantity of output produced c reflect the change in NPV when one more unit of output is produced and sold d are subtracted from fixed costs to compute the contribution margin e are inversely related to the number of units sold SECTION: 11.3 TOPIC: VARIABLE COSTS TYPE: DEFINITIONS Fixed costs: a change as the quantity of output produced changes B are constant over the short-run regardless of the quantity of output produced c reflect the change in a variable when one more unit of output is produced d are subtracted from sales to compute the contribution margin e can be ignored in scenario analysis since they are constant over the life of a project SECTION: 11.3 TOPIC: FIXED COSTS TYPE: DEFINITIONS 11-2 Chapter 011 Project Analysis and Evaluation The change in revenue that occurs when one more unit of output is sold is called the _ revenue A marginal b average c total d fixed e variable SECTION: 11.3 TOPIC: MARGINAL REVENUE TYPE: DEFINITIONS 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 financial SECTION: 11.3 TOPIC: ACCOUNTING BREAK-EVEN TYPE: DEFINITIONS The sales level that results in a project's operating cash flow exactly equaling zero is called the _ break-even a operational b leveraged c accounting D cash e financial SECTION: 11.4 TOPIC: CASH BREAK-EVEN TYPE: DEFINITIONS 11-3 Chapter 011 Project Analysis and Evaluation 10 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 financial SECTION: 11.4 TOPIC: FINANCIAL BREAK-EVEN TYPE: DEFINITIONS 11 Operating leverage is the: a dependence of a firm on variable costs b percentage of a sales price that is needed to cover variable costs c percentage of the sales price which represents the contribution margin D degree to which a firm relies on fixed costs e amount of debt used to finance a project SECTION: 11.5 TOPIC: OPERATING LEVERAGE TYPE: DEFINITIONS 12 The percentage change in operating cash flow relative to the percentage change in quantity sold is called the: a marginal profit B degree of operating leverage c gross profit d net profit e contribution margin SECTION: 11.5 TOPIC: DEGREE OF OPERATING LEVERAGE TYPE: DEFINITIONS 11-4 Chapter 011 Project Analysis and Evaluation 13 The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: a marginal spending b average spending C soft rationing d hard rationing e marginal rationing SECTION: 11.6 TOPIC: SOFT RATIONING TYPE: DEFINITIONS 14 Hard rationing is defined as the situation where: a two projects have the same NPV but only one project can be financed b firms are forced to chose one project over another c divisions within a firm are granted equal amounts for capital expenditures d divisions within a firm request more funds for capital projects than firms have available for use E a firm is unable to raise the funds needed for a project from any source SECTION: 11.6 TOPIC: HARD RATIONING TYPE: DEFINITIONS 15 Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: a method of analysis used to make the decision b initial cash outflow c ability to recoup any investment in net working capital D accuracy of the projected cash flows e length of the project SECTION: 11.1 TOPIC: FORECASTING RISK TYPE: CONCEPTS 11-5 Chapter 011 Project Analysis and Evaluation 16 Jennie is fairly cautious when considering new opportunities and therefore analyzes each project to determine the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected Jennie is using: a forecast modeling b sensitivity analysis c break-even analysis d soft rationing E scenario analysis SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS 17 Conducting scenario analysis on a proposed project helps managers determine the: a impact that an individual variable has on the outcome of the project b initial cost that will be required to implement the project c actual profitable life of the project d level of funding available for the project E potential range of reasonable outcomes that might be realized SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS 18 When conducting a best case scenario analysis, you should assume that: a the number of units sold and the variable cost per unit are at the high end of their potential ranges B the salvage value will be at the high end of its possible range c sales quantity will be at the low end of its range while the sales price is the highest price possible d the variable costs per unit are at the high end of potential cost range e fixed costs will become variable and decrease in dollar amount SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS 11-6 Chapter 011 Project Analysis and Evaluation 19 The base case values used in scenario analysis are the ones considered the most: a optimistic b desired by management c pessimistic d conducive to creating a positive net present value E likely to occur SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS 20 Which of the following variables will be at their highest expected level under a worst case scenario? I fixed cost II sales price III variable cost IV sales quantity a I only b III only c II and III only D I and III only e I, III, and IV only SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS 21 When you assign the highest sales price and the lowest costs to a project, you are analyzing the project under the condition known as: a optimistic sensitivity b pessimistic sensitivity C optimistic scenario analysis d pessimistic scenario analysis e base case scenario analysis SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS 11-7 Chapter 011 Project Analysis and Evaluation 22 Which one of the following statements concerning scenario analysis is correct? a The worst case scenario determines the maximum loss, in current dollars, that a firm could incur from a given project b Scenario analysis reflects the entire range of results that can be realized from a proposed investment project c Scenario analysis provides a clear signal to management to either accept or reject a proposed project D Scenario analysis provides management with a glimpse of the possible range of outcomes that could be realized from a project e When the base case scenario results in a positive net present value, management can be assured the proposed project will meet or exceed their expectations SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: CONCEPTS 23 Sensitivity analysis determines the: a range of possible outcomes given that most variables can assume a range of values B degree to which the net present value reacts to changes in a single variable c extent of the range of net present values that can be realized from a proposed project d degree to which a project is reliant upon the fixed costs e ideal ratio of variable costs to fixed costs for profit maximization SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: CONCEPTS 24 Assume you graph the changes in net present value against the changes in the value of a single variable used in a project The steepness of the resulting function illustrates the: a degree of operating leverage within the project b trade-off of variable versus fixed costs utilized by the project c range of total outcomes possible from accepting a proposed project d contribution margin of the project at various levels of output E degree of sensitivity of the project's outcome to changes in the single variable SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: CONCEPTS 11-8 Chapter 011 Project Analysis and Evaluation 25 As the degree of sensitivity of a project to a single variable rises, the: a less important the variable to the final outcome of the project b less volatile the project's net present value to that variable C greater the importance of accurately predicting the value of that variable d greater the profit margin of the project e less volatile the project's outcome SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: CONCEPTS 26 Sensitivity analysis is based on: A varying a single variable and measuring the resulting change in the NPV of a project b applying differing discount rates to a project's cash flows and measuring the effect on the NPV c expanding and contracting the number of years for a project to determine the optimal project length d the best, worst, and most expected situations e various states of the economy and the probability of each state occurring SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: CONCEPTS 27 To ascertain whether the accuracy of a variable cost estimate for a project will have much effect on the final outcome of that project, you should conduct _ analysis a leverage b scenario c break-even D sensitivity e cash flow SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: CONCEPTS 11-9 Chapter 011 Project Analysis and Evaluation 28 Simulation analysis is based on assigning a _ and analyzing the results a narrow range of values to a single variable b narrow range of values to multiple variables simultaneously c wide range of values to a single variable D wide range of values to multiple variables simultaneously e single value to each of the variables SECTION: 11.2 TOPIC: SIMULATION TYPE: CONCEPTS 29 The type of analysis that is most dependent upon the use of a computer is _ analysis a scenario b break-even c sensitivity d degree of operating leverage E simulation SECTION: 11.2 TOPIC: SIMULATION TYPE: CONCEPTS 30 Which one of the following is most likely a fixed cost? A office rent b employee wages c sales tax d raw materials e shipping costs SECTION: 11.3 TOPIC: FIXED COSTS TYPE: CONCEPTS 11-10 Chapter 011 Project Analysis and Evaluation 63 What is the earnings before interest and taxes under the base case scenario? a $10,560 B $16,000 c $22,440 d $41,000 e $66,000 EBIT for base case = [10,000 ($13 $6)] $29,000 $25,000 = $16,000 AACSB TOPIC: ANALYTIC SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: PROBLEMS 64 What is the earnings before interest and taxes under the worst case scenario? a $840 B $1,650 c $2,810 d $5,090 e $8,530 EBIT for worst case = (10,000 $25,000 = $1,650 95) [($13 94) AACSB TOPIC: ANALYTIC SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: PROBLEMS 11-26 ($6 1.04)] ($29,000 1.04) Chapter 011 Project Analysis and Evaluation 65 What is the net income under the best case scenario? a $5,440.00 b $10,665.80 c $15,846.60 D $20,704.20 e $24,696.80 Net income for best case = {[10,000 1.05] 96) $25,000} {1 34} = $20,704.20 [($13 1.06) ($6 96)] ($29,000 AACSB TOPIC: ANALYTIC SECTION: 11.2 TOPIC: SCENARIO ANALYSIS TYPE: PROBLEMS 66 What is the operating cash flow for a sensitivity analysis using total fixed costs of $26,000? a $19,000 b $22,960 c $29,040 d $31,460 E $37,540 EBIT = [(10,000 ($13 $6)] $26,000 $25,000 = $19,000 Tax = $19,000 34 = $6,460 OCF = $19,000 + $25,000 $6,460 = $37,540 AACSB TOPIC: ANALYTIC SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: PROBLEMS 11-27 Chapter 011 Project Analysis and Evaluation 67 What is the contribution margin for a sensitivity analysis using a variable cost per unit of $9? a $3 B $4 c $7 d $9 e $13 Contribution margin = $13 - $9 = $4 AACSB TOPIC: ANALYTIC SECTION: 11.2 TOPIC: SENSITIVITY ANALYSIS TYPE: PROBLEMS 68 Your company is reviewing a project with labor cost of $11.60 per unit, raw materials cost of $24.58 a unit, and fixed costs of $12,000 a month Sales are projected at 10,000 units over the four-month life of the project What are the total variable costs of the project? a $116,000 b $129,800 c $141,800 D $361,800 e $373,800 Total variable costs = ($11.60 + $24.58) 10,000 = $361,800 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: VARIABLE COST TYPE: PROBLEMS 11-28 Chapter 011 Project Analysis and Evaluation 69 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 $6.25 B $6.50 c $6.75 d $7.00 e $7.25 [10,000 ($12.00 v)] $40,000 $8,500 = $6,500; v = $6.50 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: VARIABLE COST TYPE: PROBLEMS 70 At a production level of 6,500 units, a project has total costs of $95,000 The variable cost per unit is $10.80 What is the amount of the total fixed costs if the production level is increased to 7,000 units without increasing the total fixed assets? a $19,400 b $21,600 C $24,800 d $28,000 e $30,200 Total fixed cost = $95,000 (6,500 $10.80) = $24,800 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: FIXED COST TYPE: PROBLEMS 11-29 Chapter 011 Project Analysis and Evaluation 71 A company is considering a project with a cash break-even point of 14,500 units The selling price is $14 a unit and the variable cost per unit is $8 What is the projected amount of fixed costs? A $87,000 b $94,000 c $109,000 d $116,000 e $203,000 FC at the cash break-even point = 14,500 ($14 $8) = $87,000 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: FIXED COST TYPE: PROBLEMS 72 Highland's Hats currently produces 1,500 ski hats at a total cost of $11,520 If the firm produces 1,501 ski hats, the total costs increase to $11,527.66 What is the minimal price Highland's Hats can charge for the 1,501st ski hat without affecting the firm's profits? a $7.65 B $7.66 c $7.67 d $7.68 e $7.69 Marginal cost of 1,501st unit = $11,527.66 $11,520 = $7.66 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: MARGINAL COST TYPE: PROBLEMS 11-30 Chapter 011 Project Analysis and Evaluation 73 Choice Coffee has computed their fixed costs to be $.20 for every cup of coffee they sell given an average daily sales level of 600 cups They charge $1.65 per cup of coffee The variable cost per cup is $.45 What is the contribution margin per cup of coffee sold? a $.65 b $.90 c $1.00 D $1.20 e $1.65 Contribution margin = $1.65 $.45 = $1.20 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: CONTRIBUTION MARGIN TYPE: PROBLEMS 74 Madeline's Specialty Goods is considering a project with total sales of $19,000, total variable costs of $10,400, total fixed costs of $4,500, and estimated production of 500 units The depreciation expense is $2,600 a year What is the contribution margin per unit? a $12.00 B $17.20 c $23.80 d $29.00 e $34.00 Contribution margin = ($19,000 $10,400) / 500 = $17.20 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: CONTRIBUTION MARGIN TYPE: PROBLEMS 11-31 Chapter 011 Project Analysis and Evaluation 75 Your company is considering a new project with estimated depreciation of $630, fixed costs of $5,000, and total sales of $10,050 The variable cost per unit are estimated at $3.75 What is the accounting break-even level of production? a 1,100 units B 1,179 units c 1,216units d 1,298 units e 1,347 units Accounting break-even Q = ($5,000 + $630) / [($10,050 / Q) $3.75]; Q = 1,178.67 = 1,179 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: ACCOUNTING BREAK-EVEN TYPE: PROBLEMS 76 The accounting break-even production quantity for a project is 5,850 units The fixed costs are $27,400 and the contribution margin is $7 What is the projected depreciation expense? a $0 b $12,836 c $12,914 d $13,224 E $13,550 Depreciation at the accounting break-even = (5,850 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: ACCOUNTING BREAK-EVEN TYPE: PROBLEMS 11-32 $7) $27,400 = $13,550 Chapter 011 Project Analysis and Evaluation 77 A project has an accounting break-even point of 1,600 units The fixed costs are $3,200 and the depreciation expense is $200 The projected variable cost per unit is $20.50 What is the projected sales price? a $9.65 b $14.75 c $18.35 d $20.50 E $22.63 Accounting break-even Q = 1,600 = ($3,200 + $200) / (P $20.50); P = $22.63 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: ACCOUNTING BREAK-EVEN TYPE: PROBLEMS 78 A proposed project has fixed costs of $3,700, depreciation expense of $1,400, and a sales quantity of 1,500 units What is the contribution margin if the projected level of sales is the accounting break-even point? a $2.47 b $2.64 c $3.10 D $3.40 e $3.71 Contribution margin = ($3,700 + $1,400) / 1,500 = $3.40 AACSB TOPIC: ANALYTIC SECTION: 11.3 TOPIC: ACCOUNTING BREAK-EVEN TYPE: PROBLEMS 11-33 Chapter 011 Project Analysis and Evaluation 79 The Baltimore Co would like to add a new product to complete their lineup They want to know how many units they must sell to limit their potential loss to their initial investment What is this quantity if their fixed costs are $14,000, the depreciation expense is $2,800, and the contribution margin is $1.25? a 2,240 units b 6,880 units c 8,960 units D 11,200 units e 13,440 units Cash break-even point = $14,000 / $1.25 = 11,200 AACSB TOPIC: ANALYTIC SECTION: 11.4 TOPIC: CASH BREAK-EVEN TYPE: PROBLEMS 80 The Handelcreek Co is considering expanding their operations Fixed costs are estimated at $86,000 a year The variable cost per unit is estimated at $18.50 The estimated sales price is $34.00 per unit What is the cash break-even point of this project? a 2,529 units b 4,649 units C 5,548 units d 7,114 units e 9,740 units Cash break-even point = $86,000 / ($34.00 $18.50) = 5,548.39 = 5,548 AACSB TOPIC: ANALYTIC SECTION: 11.4 TOPIC: CASH BREAK-EVEN TYPE: PROBLEMS 11-34 Chapter 011 Project Analysis and Evaluation 81 A project has a contribution margin of $6, projected fixed costs of $14,000, projected variable cost per unit of $14, and a projected financial break-even point of 6,000 units What is the operating cash flow at this level of output? A $22,000 b $34,000 c $46,000 d $62,000 e $70,000 Operating cash flow at the financial break-even point = (6,000 $6) $14,000 = $22,000 AACSB TOPIC: ANALYTIC SECTION: 11.4 TOPIC: FINANCIAL BREAK-EVEN TYPE: PROBLEMS 82 The Colby Brothers have been busy analyzing a new product They have determined that an operating cash flow of $18,200 will result in a zero net present value, which is a company requirement for project acceptance The fixed costs are $11,650 and the contribution margin is $7.40 The company feels that they can realistically capture five percent of the 75,000 unit market for this product Should the company develop the new product? Why or why not? a Yes; The project has an expected internal rate of return of 100 percent b Yes; The expected level of sales exceeds the required number of units c Yes; The project is expected to sell 324 units more than the required number of units D No; The expected level of sales is less than the required level of 4,034 units e No; The annual sales would need to exceed 4,521 units to be acceptable Financial break-even point = ($11,650 + $18,200) / $7.40 = 4,033.78 = 4,034 units Expected sales = 75,000 05 = 3,750 units The project should not be accepted because the expected level of sales is less than the financial break-even point AACSB TOPIC: ANALYTIC SECTION: 11.4 TOPIC: FINANCIAL BREAK-EVEN TYPE: PROBLEMS 11-35 Chapter 011 Project Analysis and Evaluation 83 ABC, Inc is considering a project with a discounted payback just equal to the project's life The projections include a sales price of $13, variable cost per unit of $10.50, and fixed costs of $5,000 The operating cash flow is $6,300 What is the break-even quantity? a 3,869 units b 3,913 units c 4,340 units D 4,520 units e 4,610 units Financial break-even point = ($5,000 + $6,300) / ($13 $10.50) = 4,520 units AACSB TOPIC: ANALYTIC SECTION: 11.4 TOPIC: FINANCIAL BREAK-EVEN TYPE: PROBLEMS 84 A coworker is in charge of a project that has a degree of operating leverage of 2.0 What will happen to the operating cash flows if your coworker decreases the number of units sold by 10 percent? a 10 percent decrease B 20 percent decrease c percent increase d 10 percent increase e 20 percent increase Percentage change in OCF = 2.0 ( 10) = 20 = 20 percent decrease AACSB TOPIC: ANALYTIC SECTION: 11.5 TOPIC: OPERATING LEVERAGE TYPE: PROBLEMS 11-36 Chapter 011 Project Analysis and Evaluation 85 The department manager has noted that every time the sales quantity increases by percent for a particular project, the operating cash flow for the project increases by percent What is the degree of operating leverage for this project if the contribution margin is $2? a .67 B 1.50 c 1.67 d 2.00 e 3.00 Degree of operating leverage = 09 / 06 = 1.50 AACSB TOPIC: ANALYTIC SECTION: 11.5 TOPIC: OPERATING LEVERAGE TYPE: PROBLEMS 86 The fixed costs of a project are $6,000 The depreciation expense is $4,500 and the operating cash flow is $18,000 What is the degree of operating leverage for this project? A 1.33 b 1.44 c 1.50 d 2.25 e 3.00 Degree of operating leverage = + ($6,000 / $18,000) = 1.33 AACSB TOPIC: ANALYTIC SECTION: 11.5 TOPIC: OPERATING LEVERAGE TYPE: PROBLEMS 11-37 Chapter 011 Project Analysis and Evaluation 87 Donald and Sons manage a product with a 3.0 degree of operating leverage Sales of the product are expected to increase by 10 percent next year What is the expected change in the operating cash flow for this product for next year? a 3.3 percent increase b 10 percent increase C 30 percent increase d 10 percent decrease e 30 percent decrease Percentage change in OCF = 3.0 10 = 30 = 30 percent increase AACSB TOPIC: ANALYTIC SECTION: 11.5 TOPIC: OPERATING LEVERAGE TYPE: PROBLEMS Essay Questions 88 What is operating leverage and why is it important in the analysis of capital expenditure projects? The textbook defines operating leverage as "the degree to which a firm or project relies on fixed costs" The more capital intensive a firm becomes, the higher the firm's degree of operating leverage The degree of operating leverage determines the percentage change in a firm's operating cash flow relative to the percentage change in sales quantity Thus, capital intensive firms are more susceptible to forecasting risk AACSB TOPIC: REFLECTIVE THINKING SECTION: 11.5 TOPIC: OPERATING LEVERAGE 11-38 Chapter 011 Project Analysis and Evaluation 89 What is forecasting risk and why is it important to the analysis of capital expenditure projects? Forecasting risk, as defined by the textbook, is "the possibility that errors in projected cash flows will lead to incorrect decisions" For example, cash flows that are overly optimistic might result in a projected positive NPV and lead to project acceptance, when in reality, the project should have been rejected AACSB TOPIC: REFLECTIVE THINKING SECTION: 11.1 AND 11.2 TOPIC: FORECASTING RISK 90 How the accounting, cash, and financial break-even points differ from one another? The accounting break-even point is the level of sales required for a firm to just cover its fixed operating costs and depreciation expense resulting in a zero net income The cash break-even point is the level of sales at which the firm covers its cash fixed operating costs causing the operating cash flow to equal zero The financial break-even point is the level of sales which causes the NPV of a project to equal zero which indicates that the project has no wealth implications for the firm AACSB TOPIC: REFLECTIVE THINKING SECTION: 11.3 AND 11.4 TOPIC: BREAK-EVEN ANALYSIS 91 What is the benefit of scenario analysis if it does not always produce a clear accept or reject decision for a proposed project? Sometimes scenario analysis provides a fairly clear indicator that a project should be either accepted or rejected Frequently however, no clear cut accept or reject decision is indicated However, scenario analysis does provide managers with a general feel for the volatility and potential range of outcomes that might be realized if a project is accepted This understanding helps managers decide whether or not a project is acceptable to their firm at a particular point in time AACSB TOPIC: REFLECTIVE THINKING SECTION: 11.2 TOPIC: SCENARIO ANALYSIS 11-39 Chapter 011 Project Analysis and Evaluation 92 Consider the following statement by a project analyst: "I analyzed a project using best case, worst case, and most expected case scenario analysis I computed break-evens and degrees of operating leverage I conducted 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 with my gut feel." Critique this statement Project analysis, in all of its various forms, is designed to help project analysts ask the right questions and gain information regarding the potential range of outcomes, the volatility of those outcomes, and the pros and cons of a project By conducting this analysis, the analyst gains a better understanding of the situation by asking the right questions However, the final results of the analysis are subject to error especially if the cash flow forecasts are questionable AACSB TOPIC: REFLECTIVE THINKING SECTION: 11.7 TOPIC: EVALUATION 11-40 ... the contribution margin D degree to which a firm relies on fixed costs e amount of debt used to finance a project SECTION: 11.5 TOPIC: OPERATING LEVERAGE TYPE: DEFINITIONS 12 The percentage change... percentage change in quantity sold is called the: a marginal profit B degree of operating leverage c gross profit d net profit e contribution margin SECTION: 11.5 TOPIC: DEGREE OF OPERATING LEVERAGE... is defined as the situation where: a two projects have the same NPV but only one project can be financed b firms are forced to chose one project over another c divisions within a firm are granted