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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 86 )

Updated On: 26-Jan-2026
Page 86 of 793
PDF with 3960 Questions

Which of the following is/are true about operating cash flows of a project?

  1. The annual operating cash flow equals operating income minus net non-cash expenses.
    II. Financing costs are excluded from the operating cash flows.
    III. Project evaluation is based on net cash flows, not net income.
  2. III only
  3. I, II & III
  4. I only
  5. II & III
  6. I & III
  7. II only
  8. I & II

Answer(s): D

Explanation:

The annual operating cash flow equals operating income plus net non-cash expenses. Financing costs are excluded since they are accounted for in the discounting process through the use of WACC.



Vanderheiden Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process S has a cost of $8,000 and will produce net cash flows of $5,000 per year for 2 years. Process L will cost $11,500 and will produce cash flows of $4,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end

of each year, and if Vanderheiden's cost of capital is 10 percent, by what amount will the better project increase Vanderheiden's value?

  1. $1,179.46
  2. $1,237.76
  3. $677.69
  4. $1,312.31
  5. $1,098.89

Answer(s): B

Explanation:

0 k = 10%1234
S
-8,0005,0005,0005,0005,000
-8,000
-3,000
IRR(S) = 16.26%.
NPV(S) = $1,237.76. (extended NPV)
0 k = 10%1234
L
-11,5004,0004,0004,0004,000
IRR(L) = 14.66%.
NPV(L) = $1,179.46.



Intelligent Semiconductor, a diversified technology company, is evaluating the sales of its cadmium silicon transistor coils, and has identified the following information:
Fixed production costs for these transistors are $800,000
Average sales price per unit is $505.50
Break-even quantity of 4,084
Which of the following best describes the average variable cost for this product?

  1. $424.16
  2. $195.89
  3. $20.84
  4. $309.61
  5. The average variable cost cannot be determined from the information provided.

Answer(s): D

Explanation:

To calculate the break-even quantity for a product, use the following equation: {Fixed operating costs/[avg.
sales price per unit - variable cost per unit]}. To determine the average variable cost of this product, we must rearrange the standard equation using algebra, in a manner such that the resulting equation resembles the following: {[$800,000/4,084] + X = $505.50}. This equation is further rearranged into the following: {$195.89 + X = $505.50}. Finally, the ending equation becomes:{X = $505.50 - $195.89}. Solving for X yields an average variable cost per unit of $309.61.



Martin Corporation currently sells 180,000 units per year at a price of $7.00 per unit; its variable cost is $4.20 per unit; and fixed costs are $400,000. Martin is considering expanding into two additional states which would increase its fixed costs to $650,000 and would increase its variable unit cost to an average of $4.48 per unit. If Martin expands it expects to sell 270,000 units at $7.00 per unit. By how much will Martin's break-even sales dollar level change?

  1. $910,667
  2. $183,333
  3. $456,500
  4. $1,200,000
  5. $805,556

Answer(s): E

Explanation:

Calculate the initial breakeven volume in dollars:
Old S(BE) = FC/(1-(VC/S)) = $400,000/1-(4.20/7.00) = $1,000,000.
Calculate the new breakeven volume in sales dollars:
New S(BE) = FC/(1-(VC/S)) $650,000/1-(4.48/7.00) = $1,805,556.
The increase in SB = $1,805,556 - $1,000,000 = $805,556.



When a firm uses no debt,

  1. its financial risk equals its business risk.
  2. its business risk equals the market risk.
  3. all of these answers.
  4. its ROA equals its ROE.

Answer(s): D

Explanation:

With no debt, total capital equals total equity, giving ROA = ROE. Note that without debt, financial risk is zero since financial risk is defined as the additional risk caused due to debt in the capital structure. Market risk is the systematic risk arising from the correlation of the firm's stock price with the market and is different from business risk.



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