Ch. 5C - Project Analysis in Capital Budgeting

Question 1

Sensitivity Analysis

Answer 1

Change 1 variable at a time and see how the output changes

Question 2

Scenario Analysis

Answer 2

Change several inputs together in a sensible way to create sensible scenarios

Question 3

Simulation Analysis

Answer 3

Have a computer change all the inputs randomly according to chosen distributions for each input, then look at the distribution of the output

Question 4

NPV Break-Even Analysis

Answer 4

Determine how far an input can be changed until NPV crosses 0 (point where decision to accept/reject changes)

Question 5

Option

Answer 5

A right (but not an obligation) to do something in the future (deciding in the future based on information that is not yet available)

Question 6

Financial Option

Answer 6

A right to buy or sell something in the future

Question 7

Real Option

Answer 7

A right to undertake a business activity or initiative in the future

Question 8

What are the main types of real options?

Answer 8

• Expansion
• Abandonment
• Timing
• Production Flexibility