Fundamentals Of Corporate Finance 12th Edition By Stephen Ross – Test Bank

Chapter 11 Project Analysis and Evaluation

1) Forecasting risk is defined as the possibility that:
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.

Answer: C
Difficulty: 1 Easy
Topic: Forecasting risk
Learning Objective: 11-01 Perform and interpret a sensitivity analysis for a proposed investment.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

2) The key means of defending against forecasting risk is to:
A) rely primarily on the net present value method of analysis.
B) increase the discount rate assigned to a project.
C) shorten the life of a project.
D) identify sources of value within a project.
E) ignore any potential salvage value that might be realized.

Answer: D
Difficulty: 1 Easy
Topic: Forecasting risk
Learning Objective: 11-01 Perform and interpret a sensitivity analysis for a proposed investment.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

3) Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using?
A) Simulation testing
B) Sensitivity analysis
C) Break-even analysis
D) Rationing analysis
E) Scenario analysis

Answer: E
Difficulty: 1 Easy
Topic: Scenario analysis
Learning Objective: 11-02 Perform and interpret a scenario analysis for a proposed investment.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

4) Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?
A) Determining how fixed costs affect NPV
B) Estimating the residual value of fixed assets
C) Identifying the potential range of reasonable outcomes
D) Determining the minimal level of sales required to break-even on an accounting basis
E) Determining the minimal level of sales required to break-even on a financial basis

Answer: C
Difficulty: 1 Easy
Topic: Scenario analysis
Learning Objective: 11-02 Perform and interpret a scenario analysis for a proposed investment.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

5) Which one of the following will be used in the computation of the best-case analysis of a proposed project?
A) Minimal number of units that are expected to be produced and sold
B) The lowest expected salvage value that can be obtained for a project’s fixed assets
C) The most anticipated sales price per unit
D) The lowest variable cost per unit that can reasonably be expected
E) The highest level of fixed costs that is actually anticipated

Answer: D
Difficulty: 1 Easy
Topic: Scenario analysis
Learning Objective: 11-02 Perform and interpret a scenario analysis for a proposed investment.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

6) The base case values used in scenario analysis are the values considered to be the most:
A) optimistic.
B) desired by management.
C) pessimistic.
D) likely to create a positive net present value.
E) likely to occur.

Answer: E
Difficulty: 1 Easy
Topic: Scenario analysis
Learning Objective: 11-02 Perform and interpret a scenario analysis for a proposed investment.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) Which of the following variables will be forecast at their highest expected level under a best-case scenario?
A) Fixed costs and units value
B) Variable costs and sales price
C) Fixed costs and sales price
D) Salvage value and units sold
E) Initial cost and variable costs

Answer: D
Difficulty: 1 Easy
Topic: Scenario analysis
Learning Objective: 11-02 Perform and interpret a scenario analysis for a proposed investment.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:
A) best-case sensitivity analysis.
B) worst-case sensitivity analysis.
C) best-case scenario analysis.
D) worst-case scenario analysis.
E) base-case scenario analysis.

Answer: D
Difficulty: 1 Easy
Topic: Scenario analysis
Learning Objective: 11-02 Perform and interpret a scenario analysis for a proposed investment.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9) Which one of the following statements concerning scenario analysis is correct?
A) The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project.
B) Scenario analysis defines the entire range of results that could be realized from a proposed investment project.
C) Scenario analysis determines which variable has the greatest impact on a project’s final outcome.
D) Scenario analysis helps managers analyze various outcomes that are possible given reasonable ranges for each of the assumptions.
E) Management is guaranteed a positive outcome for a project when the worst-case scenario produces a positive NPV.

Answer: D
Difficulty: 2 Medium
Topic: Scenario analysis
Learning Objective: 11-02 Perform and interpret a scenario analysis for a proposed investment.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation

10) Sensitivity analysis determines the:
A) range of possible outcomes given that most variables are reliable only within a stated range.
B) degree to which the net present value reacts to changes in a single variable.
C) net present value range that can be realized from a proposed project.
D) degree to which a project relies on its initial costs.
E) ideal ratio of variable costs to fixed costs for profit maximization.

Answer: B
Difficulty: 1 Easy
Topic: Sensitivity analysis
Learning Objective: 11-01 Perform and interpret a sensitivity analysis for a proposed investment.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation