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Chapter 7 Financial Policies
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Terms in this set (15)
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
*NPV considers all the cash flows
*NPV considers time value of money
In the context of capital budgeting, what does a sensitivity analysis do?
It examines how sensitive a particular NPV calculation is to changes in underlying assumptions
What are the two main drawbacks of a sensitivity analysis?
*It does not consider interaction among other variables
*It may give management a false sense of security if all pessimistic estimates of NPV are positive
What are the steps of a Monte Carlo simulation?
*Specifying a model
*Specifying a distribution for each variable in the model
*Calculating NPV
*Generating outcomes
Contribution Margin =
Sales - Variable Costs
In a Monte Carlo simulation, specifying a distribution for annual revenue will generally involve what?
*Forecasting probabilities of various market shares
*Modeling industry shares
*Determining a distribution of sale prices
What is a real option?
A valuable managerial option that can affect both the future cash flows and feasibility of a project
Which costs are included in the numerator of the accounting break-even point equation?
Depreciation & Fixed Costs
In a Monte Carlo simulation, a distribution of cash flows for each future year of a given project is generated from
repeated drawings
Sunk Cost
a cost incurred in the past that is irrelevant to the capital investment decision process
Sensitivity analysis is also know as...
what-if analysis, BOP analysis
The present value break-even analysis differs from accounting break-even analysis because:
*the present value break-even analysis adjusts for the time value of money
*the present value break-even analysis adjusts for the depreciation tax shield benefit
What formula can be used to determine total revenue for a firm using Monte Carlo simulation?
Market Size
Market Share
Price per Unit
A Monte Carlo simulation analyzes...
the expected NPV by determining a probability distribution for each variable
What is the basic outcome for a Monte Carlo simulation?
a distribution of cash flow for each future year
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