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Simulation Analysis

a combination of scenario and sensitivity analysis

Sensitivity Analysis

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

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

Degree of Operating Leverage (DOL)

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

accounting break-even

the sales level that results in zero project net income

Capital Rationing

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

hard rationing

the situation that occurs when a business cannot raise financing for a project under any circumstances

soft rationing

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