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?

a. $24,126;

b. $26,280;

c. $27,090;

d. $27,820;

e. $28,626.

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.