CH 7: Uncertainty and Project Evaluation

Question 1

What is break even analysis?

Answer 1

amount needed in sales to break even

Question 2

What are the three break-even measures?

Answer 2

• accounting (sales volume at which net income = 0)
• cash (sales volume at which operating cash flow = 0)
• financial (sales volume at which NPV = 0)

Question 3

What are the steps for a Monte Carlo simulation?

Answer 3

1: specify the basic model
2: specify a distribution for each variable in the model
3: the computer draws one outcome
4: repeat
5: calculate NPV