QUESTION 6. (11 MARKS)

A. (5 marks). Please choose one of the four answers (1 mark for each):

1. The base case values used in scenario analysis are the ones considered the most: A. optimistic. B. desired by management. C. pessimistic. D. likely to occur.

2. 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.

3. As the degree of sensitivity of a project to a single variable rises, the: A. less important the variable to the final outcome of the project. B. greater the sensitivity of the project to the other variable inputs. C. less volatile the project's net present value to that variable. D. greater the importance of accurately predicting the value of that variable.

4.The issue of forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

A. method of analysis used to make the decision. B. initial cash outflow. C. ability to recoup any investment in net working capital. D. accuracy of the projected cash flows.

5. Simulation analysis relies on assigning a _____ and analyzing the results. A. narrow range of values to a single variable B. narrow range of values to multiple variables simultaneously C. wide range of values to a single variable D. wide range of values to multiple variables simultaneously

B. (6 marks)

AXIA Inc. has a new six-year project that produces high-end backpacks with an initial investment equals to $60,000. The estimated selling price equals $85 per unit and variable costs equal $60 per unit. Fixed costs equal to $26,000. Investors do require a 14% return.

1. Calculate the cash break-even quantity? Interpret your answer.

2. Calculate the accounting break-even quantity? Interpret your answer.

3. Calculate the financial break-even quantity? Interpret your answer.

4. What is the degree of operating leverage for this project? Assuming that sales are estimated at $170,000.