25. What happens to the NPV of a one-year project if fixed costs increase from $

Question

25. What happens to the NPV of a one-year project if fixed costs increase from $400 to $600? The firm has a 15% tax rate and a 12% cost of capital.
____
A) NPV decreases by $200.00
B) NPV decreases by $173.91
C) NPV decreases by $130.00
D) NPV decreases by $113.04


26. A firm has to select a project from among four mutually exclusive projects with the risk/return characteristics in the table below. Which of the following statements BEST describes how this selection should be made?
Project A B C D
Expected Return 23% 15% 18% 20%
Standard Deviation 12% 7.69% 8.23% 10.67%
____
A) Project A should be chosen because it has the highest expected return
B) Project B should be selected because it has a standard deviation of only 7.69%
C) Project C should be accepted because it has the lowest coefficient of variation
D) Project D should be picked because it has the highest coefficient of variation


27. Which of the flowing technique may be more appropriate to analyze projects with interrelated variables?
____
A) Sensitivity analysis
B) Scenario analysis
C) Breakeven analysis
D) Decision tree analysis


28. What is the maximum percentage of variable costs in relation to sales that a firm can experience and still break even with $5 million revenues, $1 million fixed costs and $500,000 depreciation?
____
A) 60%
B) 70%
C) 80%
D) 90%
Hint: EBIT = S

Explanation / Answer

Inc in FC from 400 to 600 will result in decrease of Profit by $ 200 i.e 400-600 As Tax is 15%, the Net profit will decrease by 15%*200 = $30 SO Profit After Tax will decrease by $200-$30 = $170 So NPV will decrease by CF1/(1+Kd)^1 = $170/(1+12%)^1 = $151.79

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