1. Assume that a firm has an average net income of $125,000 and an average book

Question

1. Assume that a firm has an average net income of $125,000 and an average book value of $500,000. What is the firm’s average accounting return? A. 25 percent C. 40 percent B. 65 percent D. 12.5 percent

2. A project requires an initial investment of $75,000 today. The present value of the cash inflows likely to result from this initial investment is $98,293. What is the net present value of this investment? A. –$23,293 C. $51,707 B. $75,000 D. $23,293

3. Assume that an item costs $4 per unit to manufacture, and sells for $19 per unit. What is the unit contribution margin? A. $23 C. $15 B. 21 percent D. 4.75 percent

4. A company manufactures an item that has a unit contribution margin of $9. The firm has fixed costs of $3,600 per year. What is the break-even point, in units? A. 27 units C. 32,400 units B. 400 units D. 200 units

5. Which of the following statements about operating leverage is not correct? It is notA A. Operating leverage is a measure of risk. B. Operating leverage increases as fixed costs increase. C. Operating leverage decreases as variable costs decrease. D. Operating leverage is a combination of scenario and sensitivity analysis

6. When a firm introduces a new product, it can have a negative effect on the cash flows from existing products. This negative effect is known as A. opportunity cost. C. erosion. B. incremental cash flow. D. MACRS depreciation

Explanation / Answer

1 )correct option is "A" - 25%                                [125000/500000]

2)correc option is "D" - 23293

NPV = Present value -II

        = 98293-75000 = 23293

3)correct option is "C" - $ 15                               [19-4]

4)correct option is "B" - 400 units

BEP (units ) =fixed cost /contribution per unit

                 = 3600 / 9 = 400 units

5)correct option is "D" -operating leverage is a combination of scenario and sensitivity analysis

6)correct option is "A" -opportunity cost

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