Chapter 11 Project Analysis and Evaluation

OCFA = −$83,000(1 − .23) + ($438,000/6)(.23)
OCFA = −$47,120

NPVA = −$438,000 + (−$47,120){[1 − (1/1.1426)]/.142}
NPVA = −$620,235

OCFB = −$92,000(1 − .23) + ($369,000/5)(.23)
OCFB = −$53,866

NPVB = −$369,000 + (−$53,866){[1 − (1/1.1425)]/.142}
NPVB = −$553,041

System B should be chosen because it has the more positive (less
negative) net present value.
141) D
NPV = 0 = −$1,867,000 − 310,000 − 32,000 − $5,000{[1 −
(1/1.144)]/.14} + [$950,000(1 − .35) + $52,000 + 400,000]/1.145 +
OCF{[1 − (1/1.145)]/.14}
OCF = $485,891.18

$485,891.18 = [($P − .0021)(70,000,000) − $440,000][1 − .35] +
($1,867,000/5)(.35)
P = $.01619

Student name:
1) A project with a life of 5 years is expected to provide annual sales of $250,000 and costs
of $165,000. The project will require an investment in equipment of $475,000, which will be
depreciated on a straight-line method over the life of the project. You feel that both sales and
costs are accurate to +/−10 percent. The tax rate is 21 percent. What is the annual operating cash
flow for the best-case scenario?
1)

, A) $75,900
B) $119,885
C) $64,100
D) $101,250
E) $88,600



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Scenario analysis
Learning Objective : 11-01 Perform and interpret a sensitivity analysis for a proposed investment.
Section : 11.2 Scenario and Other What-If Analyses
Bloom's : Understand




2) A 6-year project is expected to provide annual sales of $181,000 with costs of $92,500.
The equipment necessary for the project will cost $310,000 and will be depreciated on a straight-
line method over the life of the project. You feel that both sales and costs are accurate to +/−15
percent. The tax rate is 21 percent. What is the annual operating cash flow for the worst-case
scenario?
2)


A) $103,053
B) $31,334
C) $48,355
D) $33,708
E) $61,605



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Scenario analysis
Learning Objective : 11-01 Perform and interpret a sensitivity analysis for a proposed investment.
Section : 11.2 Scenario and Other What-If Analyses
Bloom's : Understand
Bloom's : Analyze

,3) A 7-year project is expected to generate annual sales of 8,600 units at a price of $73 per
unit and a variable cost of $44 per unit. The equipment necessary for the project will cost
$293,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs
are $175,000 per year and the tax rate is 21 percent. How sensitive is the operating cash flow to a
$1 change in the per unit sales price?
3)


A) $6,794
B) $4,221
C) $3,777
D) $5,108
E) $3,333



Question Details
AACSB : Analytical Thinking
Learning Objective : 11-01 Perform and interpret a sensitivity analysis for a proposed investment.
Difficulty : 2 Intermediate
Topic : Sensitivity analysis
Section : 11.2 Scenario and Other What-If Analyses
Bloom's : Analyze




4) Sun Brite has a new pair of sunglasses it is evaluating. The company expects to sell 6,800
pairs of sunglasses at a price of $163 each and a variable cost of $115 each. The equipment
necessary for the project will cost $355,000 and will be depreciated on a straight-line basis over
the 7-year life of the project. Fixed costs are $290,000 per year and the tax rate is 21 percent.
How sensitive is the operating cash flow to a $1 increase in variable costs per pairs of
sunglasses?
4)

, A) $4,039
B) −$5,372
C) $4,488
D) −$4,987
E) −$4,039



Question Details
AACSB : Analytical Thinking
Learning Objective : 11-01 Perform and interpret a sensitivity analysis for a proposed investment.
Difficulty : 2 Intermediate
Topic : Sensitivity analysis
Section : 11.2 Scenario and Other What-If Analyses
Bloom's : Analyze




5) Forecasting risk is defined as the possibility that:
5)


A) some proposed projects will be rejected.
B) some proposed projects will be temporarily delayed.
C) incorrect decisions will be made due to erroneous cash flow projections.
D) some projects will be mutually exclusive.
E) tax rates could change over the life of a project.



Question Details
Accessibility : Keyboard Navigation
Difficulty : 1 Basic
Learning Objective : 11-01 Perform and interpret a sensitivity analysis for a proposed investment.
Section : 11.1 Evaluating NPV Estimates
Topic : Forecasting risk
AACSB : Reflective Thinking
Bloom's : Remember




6) The key means of defending against forecasting risk is to:
6)