ch 11 project analysis and evaluation

Question 1

forecasting risk

Answer 1

the possibility that we can make a bad decision because of error in the projected cash flows

Question 2

sensitivity analysis

Answer 2

variation on scenario analysis that is useful in pinpointing the areas where forecasting risk is especially severe

Question 2

scenario analysis

Answer 2

basic form of what-if analysis
investigate changes in our NPV estimates that result from asking questions

Question 3

simulation analysis

Answer 3

combo of scenario and sensitivity analysis

Question 4

accounting break-even

Answer 4

sales volume where net income = 0
Q = (FC + D)/(P-v)

Question 5

cash break-even

Answer 5

sales volume where operating cash flow = 0
Q = (FC)/(P-v)
- ignores taxes

Question 6

financial break-even

Answer 6

sales volume where net present value = 0
Q = (FC+OCF)/(P-v)

Question 7

DOL =

Answer 7

FC/OCF +1

Question 8

operating leverage

Answer 8

the degree to which a project or firm is committed to fixed production costs

Question 9

contingency planning

Answer 9

investigation of some of the managerial options implicit in a project

Question 10

managerial options

Answer 10

• option to expand
• option to abandon
• option to wait
• tax option
• strategic options - options for future, related business moves