Chapter 11 Project Analysis and Evaluation
Chapter 11 Quiz A Student Name _________________________
Student ID ____________
________ 1.
The Premium Clothing Co. manufactures a product that has a degree of operating leverage of 2.5. What
percentage change in sales quantity is needed to increase the operating cash flow by 7.4 percent?
a. 2.50 percent
b. 2.96 percent
c. 3.38 percent
d. 4.90 percent
________ 2.
Bright Ideas, Inc. is trying to determine what the operating cash flow of a new project will be if the project is
to break-even on a financial basis at a quantity of 2,700 units. The projections include fixed costs of $14,300,
a sales price of $32.50, variable costs per unit of $18.45, and a depreciation expense of $26,750. What is the
amount of the operating cash flow?
a. $11,185
b. $12,615
c. $23,635
d. $25,485
________ 3.
Which one of the following occurs at the financial break-even point?
a. The IRR is equal to -100 percent.
b. Discounted payback period is equal to the life of the project.
c. The NPV is equal to the initial cash outflow.
d. The IRR exceeds the required rate of return.
________ 4.
DOL is equal to:
a. 1 / Contribution margin.
b. 1 − Contribution margin.
c. 1 + FC / OCF.
d. 1 + VC / OCF.
________ 5.
Which one of the following methods of analysis determines which variable presents the greatest forecasting
risk for a proposed project?
a. rationing
b. scenario
c. break-even
d. sensitivity
________ 6.
The contribution margin per unit sold is:
a. another term for the profit margin per unit.
b. equal to the sales price minus the sum of the fixed and the variable costs per unit.
c. the percentage of the sales price that remains after the variable costs have been deducted.
d. the percentage of the sales price that is needed to cover the variable costs of the item.
Use this information to answer questions 7 through 10.
Jettson Brothers, Inc. is considering the introduction of a new product. Company management has prepared
the following estimates related to the project as well as the related range of values, where applicable. The
project under consideration has a four-year life and costs $100,000. Assume there is no salvage value and
that the project is relatively risky and requires a 16 percent rate of return.
Sales quantity
9,000  8 percent
Fixed costs
$16,000  3 percent
Sales price
$18.00  5 percent
Depreciation
$25,000
Variable cost per unit
$11.00  2 percent
Tax rate
35 percent
________ 7.
What is the contribution margin under the optimistic scenario?
a. $5.88
b. $6.32
c. $8.12
d. $8.98
________ 8.
What is the projected pessimistic earnings before interest and taxes? (Round to the nearest whole dollar)
a. $7,206
b. $11,810
c. $22,000
d. $38,406
________ 9.
What is the projected optimistic net income? (Round to the nearest whole dollar)
a. $21,560
b. $24,964
c. $33,170
d. $38,406
________ 10. What is the projected base case net present value? (Round to the nearest whole dollar)
a. $9,300
b. $9,968
c. $39,300
d. $39,809
11-1
Chapter 11 Project Analysis and Evaluation
Chapter 11 Quiz A
1.
b
2.
c
3.
4.
5.
6.
7.
8.
b
c
d
c
c
a
9.
b
10.
b
Answers
Percentage change in sales quantity = .074 / 2.5 = .0296 = 2.96 percent
*
$14 ,300  OCF
; OCF* = $23,635 at the financial break-even point
2,700 
$32 .50  $18 .45
Contribution margin for the optimistic scenario = ($18.00  1.05) – ($11.00  .98) = $8.12
EBIT for pessimistic scenario = [9,000  .92]  [($18  .95) – ($11  1.02)] – ($16,000  1.03) – $25,000 =
$7,206.40 = $7,206
Net income for the optimistic scenario = {[9,000  1.08]  [($18.00  1.05) – ($11.00  .98)] – ($16,000  .97) –
$25,000}  {1 – .35} = $24,964.16 = $24,964
EBIT for base case scenario = [9,000  ($18.00 – $11.00)] – $16,000 – $25,000 = $22,000
Tax = $22,000  .35 = $7,700
OCF for base case scenario = $22,000 + $25,000 – $7,700 = $39,300
1  1 /(1  .16 ) 4  
 
 
NPV  $100 ,000  $39 ,300  
  $9,968 .499  $9,968
.16




CF0
-$100,000
C01
$39,300
F01
4
I = 16
NPV CPT
$9,968.499 = $9,968
11-2
Chapter 11 Project Analysis and Evaluation
Chapter 11 Quiz B Student Name _________________________
Student ID ____________
________ 1.
Which one of the following occurs at the cash break-even point?
a. The IRR is -100 percent.
b. The discounted payback period equals the life of the project.
c. The payback period equals the life of the project.
d. The NPV is positive.
________ 2.
Operating leverage is:
a. the percentage of a product’s selling price that remains after the variable production costs have been
subtracted.
b. the relationship between a product’s selling price and it’s total production cost.
c. the degree to which a project is committed to fixed production costs.
d. equal to (FC + D) / (P − v).
________ 3.
Which one of the following methods of analysis presents the most optimistic and the most pessimistic
outcomes which are realistically anticipated from a proposed project?
a. scenario
b. break-even
c. sensitivity
d. rationing
________ 4.
Which one of the following values is equal to zero at the accounting break-even point?
a. OCF
b. NPV
c. payback period
d. IRR
________ 5.
Bright Ideas, Inc. is trying to determine what the selling price of a new product should be if the project is to
break-even on an accounting basis at a quantity of 3,000 units. The projections include fixed costs of $5,875,
variable costs per unit of $17.50, and a depreciation expense of $3,200. What is the price they should charge?
a. $18.57
b. $19.46
c. $20.53
d. $21.13
________ 6.
The Premium Clothing Co. manufactures a project that has a degree of operating leverage equal to 1.4. How
will the operating cash flows change if the quantity sold decreases by 6.3 percent?
a. -8.82 percent
b. -4.90 percent
c. 2.22 percent
d. 4.50 percent
Use this information to answer questions 7 through 10.
Jettson Brothers, Inc. is considering the introduction of a new product. Company management has prepared
the following estimates related to the project as well as the related range of values, where applicable. The
project under consideration has a two-year life and costs $5,000. Assume there is no salvage value and that
the project is relatively risky and requires a 16 percent rate of return.
Sales quantity
4,000  6 percent
Fixed costs
$11,000  5 percent
Sales price
$15.50  4 percent
Depreciation
$2,500
Variable cost per unit
$ 9.25  3 percent
Tax rate
35 percent
________ 7.
What is the contribution margin under the pessimistic scenario?
a. $5.35
b. $5.91
c. $6.25
d. $6.59
________ 8.
What is the projected base case net income? (Round to the nearest whole dollar)
a. $4,025
b. $6,074
c. $7,475
d. $11,281
________ 9.
What is the projected optimistic earnings before interest and taxes? (Round to the nearest whole dollar)
a. $9,262
b. $11,500
c. $15,002
d. $17,355
________ 10.
What is the projected pessimistic net present value? (Round to the nearest whole dollar)
a. -$11,012
b. -$5,352
c. $5,352
d. $11,012
11-3
Chapter 11 Project Analysis and Evaluation
Chapter 11 Quiz B
1.
2.
3.
4.
a
c
a
d
5.
c
6.
7.
8.
9.
a
a
c
d
10.
c
3,000 
Answers
$5,875  $3,200
 $20 .525  $20 .53
P  $17.50
Percentage change in OCF = 1.4  - .063 = -.0882 = -8.82 percent
Contribution margin for the pessimistic scenario = ($15.50  .96) – ($9.25  1.03) = $5.3525 = $5.35
Net income for the base case scenario = {[4,000  ($15.50 – $9.25)] – $11,000 – $2,500}  {1 – .35} = $7,475
EBIT for optimistic scenario = [4,000  1.06]  [($15.50  1.04) – ($9.25  .97)] – ($11,000  .95) – $2,500 =
$17,355.40 = $17,355
EBIT for pessimistic scenario = [4,000  .94]  [($15.50  .96) – ($9.25  1.03)] – ($11,000  1.05) − $2,500 =
$6,075.40
Tax = $6,075.40  .35 = $2,126.39
OCF for pessimistic scenario = $6,075.40 + $2,500 − $2,126.39 = $6,449.01
$6,449 .01 $6,449 .01
NPV  $5,000 

 $5,352 .16
1
2
(1  .16 )
(1  .16 )
CF0
-$5,000
C01
$6,449.01
F01
2
I = 16
NPV CPT
$5,352.16 = $5,352
11-4
Chapter 11 Project Analysis and Evaluation
Chapter 11 Quiz C Student Name _________________________
Student ID ____________
________ 1.
Which one of the following conditions exists at the accounting break-even point?
a. The payback period equals the life of the project.
b. The NPV is negative and exactly equal to the initial cash outlay.
c. The IRR is -100 percent.
d. The IRR is equal to the required rate of return.
________ 2.
The lower the degree of operating leverage, the _____ the potential danger from _____ risk.
a. greater; capital
b. greater; forecasting
c. lower; capital
d. lower; forecasting
________ 3.
The analysis of a project which combines scenario and sensitivity analysis is called _____ analysis.
a. simulation
b. rationing
c. DOL
d. break-even
________ 4.
Which one of the following determines the level of output required for a project to have a zero net present
value?
a. sensitivity analysis
b. cash break-even analysis
c. financial break-even analysis
d. scenario analysis
________ 5.
Bright Ideas, Inc. is trying to determine what the selling price of a new product should be if the project is to
break-even on a cash basis at a quantity of 1,900 units. The projections include fixed costs of $3,800, variable
costs per unit of $8.64, and a depreciation expense of $620. What is the price they should charge?
a. $10.64
b. $10.97
c. $11.57
d. $11.74
________ 6.
The Premium Clothing Co. manufactures a product with a degree of operating leverage of 2.5. If the fixed
costs are $800 and the depreciation expense is $430 what is the operating cash flow of this project?
a. $246.67
b. $320.00
c. $533.33
d. $820.00
Use this information to answer questions 7 through 10.
Jettson Brothers, Inc. is considering the introduction of a new product. Company management has prepared
the following estimates related to the project as well as the related range of values, where applicable. The
project under consideration has a five-year life and costs $15,000. Assume the tax rate is 34 percent, there is
no salvage value, and the project requires a 12 percent rate of return.
Sales quantity
2,000  7 percent
Sales price
$14.00  10 percent
Variable cost per unit
$10.00  2 percent
Fixed costs
$8,000  1 percent
Depreciation
$3,000
________ 7.
What is the contribution margin under the pessimistic scenario?
a. $2.40
b. $3.80
c. $4.00
d. $5.60
________ 8.
What is the projected optimistic net income? (Round to the nearest whole dollar)
a. $702
b. $904
c. $2,687
d. $3,904
________ 9.
What is the projected base case earnings before interest and taxes? (Round to the nearest whole dollar)
a. -$6,616
b. -$3,000
c. $1,920
d. $362
________ 10. What is the projected optimistic net present value? (Round to the nearest whole dollar)
a. -$1,654
b. -$1,064
c. $1,064
d. $1,654
11-5
Chapter 11 Project Analysis and Evaluation
Chapter 11 Quiz C
1.
2.
3.
4.
a
d
a
c
5.
a
6.
c
7.
8.
a
a
9.
b
10. a
1,900 
Answers
$3,800
; P = $10.64
P  $8.64
$800
OCF 
 $533 .33
2.5  1
Contribution margin for the pessimistic scenario = ($14.00  .9) – ($10.00  1.02) = $2.40
Net income for the optimistic scenario = {[2,000  1.07]  [($14.00  1.10) − ($10.00  .98)] – ($8,000  .99) −
$3,000}  {1 − .34} = $702.24 = $702
EBIT for base case scenario = [2,000  ($14.00 – $10.00)] – $8,000 – $3,000 = -$3,000
EBIT for optimistic scenario = [2,000  1.07]  [($14  1.10) – ($10  .98)] – ($8,000  .99) − $3,000 = $1,064
Tax = $1,064  .34 = $361.76
OCF for optimistic scenario = $1,064 + $3,000 − $361.76 = $3,702.24
1  1 /(1.12 ) 5  
 
 
NPV  $15,000  $3,702 .24  
  $1,654 .25
.12




CF0
-$15,000
C01
$3,072.24
F01
5
I = 12
NPV CPT
-$1,654.25 = -$1,654
11-6