FISV Chapter 11 Quiz

Soft Rationing

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

Capital Rationing

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

Simulation Analysis

a combination of scenario and sensitivity analysis.

Variable Costs

costs that change when quantity of output changes.

Fixed Costs

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

Sensitivity Analysis

investigation of what happens to NPV when only one variable is changed.

Marginal Cost

the change in costs that occurs when there is a small change in output. Also called incremental cost.

Marginal Revenue

the change in revenue that occurs when there is a small change in output. Also called incremental revenue.

Operating 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.

DOL (Degree of Operating Leverage)

the percentage change in operating cash flow relative to the percentage change in quantity sold.

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.