Lecture 2- Actual

Question 1

What are the benefits of sensitivity analysis?

Answer 1

1) Forces the manager to identify the underlying variables and calculate the consequences of misestimating the variables
2) Indicates where additional information would be most useful

Question 2

What are the drawbacks of sensitivity analysis?

Answer 2

1) What optimistic and pessimistic means

2) Underlying variables likely to be interrelated

Question 3

What does scenario analysis involve?

Answer 3

If the variables are interrelated- use scenario analysis to look at different but consistent combinations of variables

Question 4

What is the breakeven formula?

WHat is the difference when using accounting breakeven?

Answer 4

0= (((Sales Q - VC Q- FC- Dep) x tax) + Dep) x [PVAF] + Investment
Accounting breakeven- does not take into account to time value of money or opportunity cost of capital on the investment

Question 5

What does operating leverage measure?

Answer 5

Operating leverage measures the amount of fixed costs- high fixed costs has a high operating leverage, and will have a high breakeven sales

Question 6

What are the two OL formulas?

Answer 6

1) % change in profit/ % change in sales

2) 1 + (fixed costs inc. dep/ pre-tax profit)

Question 7

What are the four types of real options?

Answer 7

1) Option to expand
2) Option to abandon
3) Timing options
4) Production options

Question 8

How do we calculate the value of the option to abandon/ expand?

Answer 8

PV With option- PV without option