EBF 401 EBF401 Quiz 1 with Answers (Penn State University)
EBF 401 EBF401 Quiz 1 Answers (Penn State University)
1. 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. Are equal to the change in a variable when one more unit of output is produced;
d. Are subtracted from fixed costs to compute the contribution margin;
e. Form the basis that is used to determine the degree of operating leverage employed by a firm.
2. An annuity stream of cash flow payments is a set of:
a. Level cash flows occurring each time period for a fixed length of time;
b. Level cash flows occurring each time period forever;
c. Increasing cash flows occurring each time period for a fixed length of time;
d. Increasing cash flows occurring each time period forever;
e. Arbitrary cash flows occurring each time period for no more than 10 years.
3. 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.
4. At a production level of 5,600 units a project has total costs of $89,000. The variable cost per unit is $11.20. What is the amount of the total fixed costs?
5. The difference between the present value of an investment and its cost is the:
a. Net present value;
b. Internal rate of return;
c. Payback period;
d. Profitability index;
e. Discounted payback period.
6. You are trying to determine whether to accept project A or project B. A and B are mutually exclusive. As part of your analysis, you should compute the incremental IRR by determining:
a. The internal rate of return for the cash flows of each project;
b. The net present value of each project using the internal rate of return as the discount rate;
c. The discount rate that equates the discounted payback periods for each project;
d. The discount rate that makes the net present value of each project equal to 1;
e. The internal rate of return for the differences in the cash flows of the two projects.
7. If a project has a net present value equal to zero, then:
I. The present value of the cash inflows exceeds the initial cost of the project;
II. The project produces a rate of return that just equals the rate required to accept the project;
III. The project is expected to produce only the minimally required cash inflows;
IIII. Any delay in receiving the projected cash inflows will cause the project to have a negative net present value.
a. II and III only;
b. II and IV only;
c. I, II and IV only;
d. II, III and IV only;
e. I, II and III only.
8. The internal rate of return:
I. Rule states that a typical investment project with an IRR that is less than the required rate should be accepted;
II. Is the rate generated solely by the cash flows of an investment;
III. Is the rate that causes the net present value of a project to exactly equal zero;
IIII. Can effectively be used to analyze all investment scenarios.
a. I and IV only;
b. II and III only;
c. I, II and III only;
d. II, III and IV only;
e. I, II, III and IV.
9. The potential decision to abandon a project has option value because:
a. Abandonment can occur at any future point in time;
b. A project may be worth more dead than alive;
c. Management is not locked into a negative outcome;
d. All of these;
e. None of these.
10. Define the yield to maturity.
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