11
Fixed costs:
Are constant over the short-run regardless of the quantity of output produced.
Scenario analysis is defined as the:
Determination of changes in NPV estimates when what-if questions are posed.
Operating leverage is the degree of dependence a firm places on its:
Fixed costs.
Best case scenario
High revenue, low costs
Forecasting risk
How sensitive our NPV is to changes in the cash flow estimates. More sensitive, greater forecasting risk.
The base case values used in scenario analysis are the values considered to be the most:
Likely to occur
By definition, which one of the following must equal zero at the cash break-even point?
Operating cash flow.
A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes.
Sales price per unit.
A project has a payback period that exactly equals the project's life. The project is operating at:
The accounting break-even point.
Simulation analysis is based on assigning a _____ and analyzing the results.
Wide range of values to multiple variables simultaneously.
Scenario Analysis
how does NPV change under different cash flow scenarios
Worst Case scenario
low revenues, high costs
Degree of operating leverage
measure used to evaluate how a company's operating income changes with respect to a percentage change in its sales
Break even analysis
minimum quantity of a product in order to meet a certain objective
By definition, which one of the following must equal zero at the cash break-even point?
ocf
Degree of operating leverage(DOL)
relationship between sales and OCF, how cash flows increase if volume of sales increase
DOL
relationship between sales and operating cash flow
Accounting break even
sales volume at which NI=0
Financial break even
sales volume at which NPV=0
Cash break even
sales volume at which OCF=0
Freeze everything except one variable
sensitivity analysis
Sensitivity Analysis
subset of scenario analysis but with specific variables. How does npv change when one variable is changed at a time(like unit sales)
Variable costs can be defined as the costs that:
vary directly with sales