A ﬁnancial manager reviewing a project is concerned about the level of forecasting risk in the project's estimated cash ﬂows. The manager should use ___________ to identify the variable that
Presents the highest degree of forecasting risk.
A) Scenario analysis.
B) Simulation analysis.
C) Sensitivity analysis.
D) Break-even analysis.
E) Strategic options analysis.

Question

Quizplus · Accepted Answer

Sensitivity analysis is a technique used to identify the variable that presents the highest degree of forecasting risk. This analysis involves adjusting the input variables one at a time to see how it affects the output variable or the project's estimated cash flows. By doing this analysis, the financial manager can identify the variable that will have the greatest impact on the project's performance and determine the range of potential outcomes for cash flows. Scenario analysis, simulation analysis, break-even analysis, and strategic options analysis are also useful techniques, but they may not be as effective as sensitivity analysis in identifying the variable that presents the highest degree of forecasting risk.

A ﬁNancial Manager Reviewing a Project Is Concerned About the Level