Chapter 7 Self Assessment (Conceptual)
The approach that further attempts to model real world uncertainty by analyzing projects the way one might analyze gambling strategies is called:
Monte Carlo simulation.
As the degree of sensitivity of a project to a single variable rises, the:
more attention management should place on accurately forecasting the future value of that variable.
Monte Carlo simulation is:
more complex than sensitivity or scenario analysis.
Theoretically, the NPV is the most appropriate method to determine the acceptability of a project. A false sense of security can overcome the decision-maker when the procedure is applied properly but the positive NPV results are accepted blindly. Sensitivity, scenario, and simulation analysis aid in the process by:
All of the above.
In a decision tree, the NPV to make the yes/no decision is dependent on:
all cash flows and probabilities.
In the present-value break-even the EAC is used to:
allocate the initial investment at its opportunity cost over the life of the project.
Fixed costs:
are constant over the short-run regardless of the quantity of output produced.
Variable costs:
change in direct relationship to the quantity of output produced.
All else constant, as the variable cost per unit increases, the:
contribution margin decreases.
Sensitivity analysis helps you determine the:
degree to which the net present value reacts to changes in a single variable.
Which one of the following is most likely a variable cost?
direct labor costs
Last month you introduced a new product to the market. Consumer demand has been overwhelming and it appears that strong demand will exist over the long-term. Given this situation, management should consider the option to:
expand.
Including the option to expand in your project analysis will tend to:
increase the net present value of a project.
The present value break-even point is superior to the accounting break-even point because:
present value break-even covers the economic opportunity costs of the investment.
An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis.
sensitivity
Simulation analysis is based on assigning a _____ and analyzing the results.
wide range of values to multiple variables simultaneously