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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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If you were the CFO of a company that had to decide on hundreds of potential projects every year, would you want to use sensitivity analysis and scenario analysis as described in the chapter, or would the amount of arithmetic required take too much time and thus not be cost-effective? What involvement would nonfinancial people such as those in marketing, accounting, and production have in the analysis?

Summary Introduction

To identify: The suitable analysis process for a company’ CFO to decide on hundreds of potential projects every year and the involvement that the nonfinancial people have in the analysis.

Introduction:

Sensitivity Analysis:

The process to evaluate the effect of change in one variable on the end result of a project is called sensitivity analysis. It reflects the change in net present value with respect to change in an input unit with other variables remaining constant.

Scenario Analysis:

The process to evaluate the different possible events and their outcomes that is end result of a project is called scenario analysis. It reflects the level of end result with multiple estimates called scenario categorized as base, best, and worst case scenario.

Explanation
  • The scenario analysis reports the changes for different levels of estimates by the changes in multiple inputs inserted together...

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