Assume that you graph the changes in net present value against the changes in the value of a single variable used in a project. The steepness of the resulting function illustrates the:
A) Degree of operating leverage within the project.
B) Trade-off of variable versus ﬁxed costs utilized by the project.
C) Range of total outcomes possible from accepting a proposed project.
D) Contribution margin of the project at various levels of output.
E) Degree of sensitivity of a project's outcome to a single variable of the project.

Question

Quizplus · Accepted Answer

The steepness of the graph indicates the degree of sensitivity of the project's outcome to changes in a single variable. This is known as sensitivity analysis, which is used to identify the level of risk associated with a project based on potential changes in variables such as costs, revenues, and market conditions. The steeper the slope of the graph, the more sensitive the project is to changes in the variable being analyzed. Therefore, the correct choice is E.

Assume That You Graph the Changes in Net Present Value