Chapter 10: Project Analysis and Evaluation

What is sensitivity analysis in investment evaluation?

Sensitivity analysis investigates how NPV changes by altering one variable at a time.

What does a positive NPV indicate?

A positive NPV indicates that a closer look is needed as projected cash flows may not align with actual cash flows.

Define scenario analysis.

Scenario analysis examines the effect of various scenarios on NPV estimates, such as best and worst cases.

What are the key components of break-even analysis?

Break-even analysis examines sales volume against profitability, considering fixed and variable costs.

What is the accounting break-even point?

The level of sales where net income equals zero.

What does operating leverage measure?

Operating leverage measures the degree to which fixed costs are used in producing goods.

What is capital rationing?

Capital rationing occurs when a firm has positive NPV projects but cannot secure necessary financing.

What effect does the degree of operating leverage have on cash flows?

High operating leverage amplifies potential changes in revenue's impact on cash flows, posing higher risks.

How is break-even calculated?

Break-even can be calculated using the formula Q_BE = (FC + D) / (P - v).

What is forecasting risk?

Forecasting risk is the risk of errors in projected cash flows leading to incorrect investment decisions.