Question 1

An analysis that breaks the net present value (NPV)calculation into its component assumptions and shows how the net present value (NPV)varies as one of the underlying assumptions changes is called ________.

Accepted Answer

Sensitivity analysis involves varying one assumption at a time to see how it affects the NPV calculation. This allows decision-makers to identify which assumptions have the biggest impact on the decision, and adjust their strategy accordingly. Scenario analysis involves varying multiple assumptions to see how they all interact and affect the NPV calculation. IRR analysis calculates the rate of return at which the project's cash flows have a present value of zero. Accounting break-even analysis calculates the production necessary for a project to break even, but does not explicitly consider the time value of money. Therefore, of the options given, sensitivity analysis is the best choice for understanding the impact of changing assumptions on NPV.

Question 2

An exploration of the effect of changing multiple project parameters on net present value (NPV)is called ________.

Accepted Answer

Scenario analysis involves analyzing the effect of changing multiple project parameters on NPV by creating different scenarios, each with different assumptions and variables, and evaluating the outcome of each scenario on the NPV. Sensitivity analysis involves examining the effect of changing one specific parameter on NPV while holding all other variables constant. Internal rate of return (IRR) analysis involves calculating the rate of return that would make the NPV equal to zero. Accounting break-even analysis involves determining the level of sales necessary to cover all costs and break even. Therefore, the best choice in this case would be scenario analysis.

Question 3

Which of the following statements regarding real options is NOT correct?

Accepted Answer

The answer of Which of the following statements regarding real...

Question 4

Jim owns a farm that he wants to sell. He learns that a highway will be built near the farm in the future, giving access to the farmland from a nearby city and thus making the land attractive to housing developers. Expecting the net present value (NPV)of the sale to be greater after the highway is built, he decides not to sell at this time. What real option is Jim taking?

Accepted Answer

Jim is taking the real option to delay the sale of his farm in order to potentially benefit from the future construction of the highway, which could increase the NPV of the sale.

Question 5

What is the major difference between scenario analysis and sensitivity analysis?

Accepted Answer

The answer of What is the major difference between scenario...

Question 6

Which of the following will cause the EBIT Break-Even for sales to increase?

Accepted Answer

The answer of Which of the following will cause the...

Question 7

The difference between scenario analysis and sensitivity analysis is ________.

Accepted Answer

Scenario analysis evaluates the effect of changing multiple project parameters on Net Present Value (NPV), while sensitivity analysis allows us to change individual estimated inputs of NPV analysis. Scenario analysis does break down NPV calculation into its component assumptions, but this is not the main difference between the two techniques. The information provided in the question about internal rate of return (IRR) is irrelevant to the difference between scenario and sensitivity analysis.

Question 8

Why does the option to abandon a project have value?

Accepted Answer

The answer of Why does the option to abandon a...

Question 9

A manufacturer of peripheral devices for PCs decides to try and capture some of the PC gaming market by creating gaming versions of its traditional peripheral devices. It decides to start with a gaming version of its standard keyboard, increasing the number of macro keys, adding a small LCD screen to display game data, and giving the user the ability to backlight keys in different colors. If this device is a success, the manufacturer plans to release gaming versions of its trackballs and other peripherals. What option is the manufacturer gaining by the release of the new keyboard?

Accepted Answer

The manufacturer is gaining the option to expand by releasing the new gaming keyboard. If the product is a success, they plan to release gaming versions of their other peripherals, which shows their intention to expand into the PC gaming market.

Question 10

After research into where to place a new restaurant, Burger Billies, a small fast-food chain, plans to open a new store near a small college. The anticipated customer base is students attending the college. They learn that a major fast food chain will be opening a franchise within the college, which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point. Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site?

Accepted Answer

With the news of a major fast food chain opening within the college, Burger Billies should abandon the proposed restaurant site near the college. It is not financially feasible to open a new store that is projected to make sales below the break-even point, especially with a competitor right next door. They should consider finding a new location with a more favorable competitive environment.

Question 11

Which of the following statements is FALSE?

Accepted Answer

The answer of Which of the following statements is FALSE?
...

Question 12

A real option is the obligation to take a particular business action.

Accepted Answer

A real option provides the right, but not the obligation, to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project.

Question 13

Which of the following statements is FALSE?

Accepted Answer

The statement D is false because break-even analysis is used to determine the level at which a project or a business starts to generate a profit, not specifically when there is certainty regarding the input to a capital budgeting decision. Break-even analysis is useful under conditions of uncertainty to understand how changes in inputs affect outcomes, not just when inputs are certain.

Quiz 9: Fundamentals of Capital Budgeting

An analysis that breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as one of the underlying assumptions changes is called ________.

An exploration of the effect of changing multiple project parameters on net present value (NPV) is called ________.

Which of the following statements regarding real options is NOT correct?

What is the major difference between scenario analysis and sensitivity analysis?

Which of the following will cause the EBIT Break-Even for sales to increase?

The difference between scenario analysis and sensitivity analysis is ________.

Why does the option to abandon a project have value?

Which of the following statements is FALSE?

A real option is the obligation to take a particular business action.

Which of the following statements is FALSE?