Chapter 11 Quiz

Capital Rationing

The situation that exists if a firm has positive NPV projects but cannot find the necessary financing.

Soft Rationing

The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting.

Variable Cost

Costs that change when the quantity of output changes.

Fixed Cost

Costs that do not change when the quantity of output changes during a particular period of time.

DOL

Degree of operating leverage; the percentage change in operating cash flow relative to the percentage change in quantity sold.

Marginal Revenue

The change in revenue that occurs when there is a small change in output.

Operational Leverage

The degree to which a firm or project relies on fixed costs.

Scenario Analysis

The determination of what happens to NPV estimates when we ask what-if questions; i.e. "what if unit sales realistically should be projected at 5,500 units instead of 6,000?"

Marginal Cost

The increase in total cost that arises from an extra unit of production.

Forecasting Risk

The possibility that errors in projected cash flows will lead to incorrect decisions; also known as estimation risk.

Financial Break-Even

The sales level that results in a zero NPV.

Cash Break-Even

The sales level that results in a zero operating cash flow.

Accounting Break-Even

The sales level that results in zero project net income

Sensitivity Analysis

Investigation of what happens to NPV when only one variable is changed; a variation of scenario analysis that is useful for pinpointing the areas where forecasting risk is especially severe.

Simulation Analysis

A combination of scenario and sensitivity analysis. In order to let both the variables and the values change, we must consider a number of scenarios and almost certainly require compute assistance.