Vhich of the following is FALSE regarding scenario and sensitivity analysis? Scenario analysis considers a best case (within reason) and worst case (within reason) scenario, along with a base case. Scenario analysis focuses on stand-alone risk, since it doesn't consider the project as a part of the larger firm. Sensitivity analysis considers that the project is one part of a larger firm. Sensitivity analysis shows how changes in a single variable affects NPV or IRR. O Scenario analysis assumes all variables take their worst (reasonable) values simultaneously, and best (reasonable) values simultaneously.

Vhich of the following is FALSE regarding scenario and sensitivity analysis? Scenario analysis considers a best case (within reason) and worst case (within reason) scenario, along with a base case. Scenario analysis focuses on stand-alone risk, since it doesn't consider the project as a part of the larger firm. Sensitivity analysis considers that the project is one part of a larger firm. Sensitivity analysis shows how changes in a single variable affects NPV or IRR. O Scenario analysis assumes all variables take their worst (reasonable) values simultaneously, and best (reasonable) values simultaneously.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 13MC

See similar textbooks

Similar questions

Which of the following is FALSE regarding scenario analysis? Scenario analysis ignores diversification that exists if the project is part of a larger firm Scenario analysis provides a range of outcomes Scenario analysis assumes all "bad" values occur simultaneously and all "good" values occur simultaneously The decision rule for scenario analysis is to accept the project if the range of the outcomes is less than 30% of the base outcome Scenario analysis examines a best case, worst case, and base case situation
If a project is more risky than the firm, and you use the WACC of the form to evaluate the project. Which one is correct? A you may incorrectly accept a negative NPV project. B you may incorrectly reject a positive NPV project
How do simulation analysis and scenario analysis differ in the way theytreat very bad and very good outcomes? What does this imply about usingeach technique to evaluate project riskiness?
Briefly review the sensitivity analysis that is presented in the case exhibits. Under what circumstances is this project financially attractive? What bets were the company making when they went ahead with the project? DO NOT HAVE TO PERFORM YOUR OWN SENSITIVITY ANALYSIS. YOU ARE TO INTERPRET THE SENSITIVITY ANALYSIS THAT IS GIVEN.
If a firm cannot measure a potential project’s risk with precision, should it abandonthe project? Explain your answer.
The board of directors of AMSB are confused between IRR and NPV. Briefly discuss the Internal Rate of Return rule used as an alternative to NPV in project evaluation. What are its strengths and weaknesses when compared to the NPV rule?
Which of the following is also known as what if analysis? a. None of the options b. Sensitivity analysis c. Risk analysis d. Project analysis
Answer the two questions below:a) What is the purpose of a project risk analysis, and why is it important in investment decision making?b) What is the difference between accounting break-even and NPV break-even? Which will offer the higher break-even level of output, and why?
Which of the following is a disadvantage of the internal rate of return criterion? Select one: a. It is not a true rate of return. b. It uses an arbitrary benchmark cutoff rate. c. It ignores time value of money, cash flows, and market values. d. It cannot be used to rank independent projects. e. It may lead to incorrect decisions when comparing mutually exclusive investments.
Discuss the following statement: “A project may not be very riskyin spite of its high sensitivity to certain variables.”
Distinguish between beta (i.e., market) risk, within-firm (i.e., corporate) risk, and stand-alone risk for a potential project. Of the three measures, which is theoretically the most relevant, and why?
Which of the following statements is CORRECT? b. Sensitivity analysis is a type of risk analysis that considers both the sensitivity of NPV to changes in key input variables and the probability of occurrence of these variables' values. c. The primary advantage of simulation analysis over scenario analysis is that scenario analysis requires a relatively powerful computer, coupled with an efficient financial planning software package, whereas simulation analysis can be done efficiently using a PC with a spreadsheet program or even with just a calculator. d. Sensitivity analysis as it is generally employed is incomplete in that it fails to consider the probability of occurrence of the key input variables. e. As computer technology advances, simulation analysis becomes increasingly obsolete and thus less likely to be used as compared to sensitivity analysis.