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