Quiz 3: Chapter 8,9 Question 1 Marks: 1 The purpose of sensitivity analysis is to show: Choose one answer. a.

None of the statements is correct. b. the optimal level of the capital budget. c. how variables in a project affect probability. d. how price changes affect break-even volume. e. seasonal variation in product demand. Question 2 Marks: 1 Sensitivity analysis evaluates projects by: Choose one answer. a. recording profitability changes while changing some variables at a time. b. None of the statements is correct. c. testing for interrelated variables. d. forecasting changes in interest rates that would increase financing costs. e. insuring that the project sponsor has proper incentives. Question 3 Marks: 1 Which of the following appears to be a more likely result from using sensitivity analysis? Choose one answer. a. Determine whether to finance with debt or equity. b. Select the best capital budgeting project. c. recording profitability changes while changing one variable at a time. d. Agreement on the appropriate discount rate e. Isolation of pivotal factors in project profitability Question 4 Marks: 1 If a 20% reduction in forecast sales would extinguish a project's profitability, then sensitivity analysis would suggest: Choose one answer.

a. the initial sales forecasts is good. b. the initial sales forecasts were inflated. c. a reallocation of fixed costs to this product. d. deemphasizing that variable as a critical factor. e. requiring a more detailed sales forecast. Question 5 Marks: 1 If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level, then: Choose one answer. a. additional marketing analysis may be beneficial before proceeding. b. variable costs should be traded for fixed costs. c. the project should not be undertaken. d. fixed costs should be traded for variable costs. Question 6 Marks: 1 If sensitivity analysis indicates some of the individual variables will cause a negative NPV under pessimistic conditions, then the: Choose one answer. a. project's discount rate should be reduced. b. interaction of the variables should be considered. c. project is assured to be successful. d. it is normal for project analysis e. economic forecasts are possibly overly optimistic. Question 7 Marks: 1 If sensitivity analysis indicates none of the individual variables will cause a negative NPV under pessimistic conditions, then the: Choose one answer. a. project's discount rate should be reduced. b. interaction of the variables should be considered. c. project is assured to be successful. d. None of the statements is correct. e. economic forecasts are possibly overly optimistic.

Question 8 Marks: 1 Which of the following is discussed in the text as a method for analyzing risk in capital budgeting? Choose one answer. a. Monte Carlo simulation. b. Sensitivity analysis c. Scenario analysis. d. Beta, or CAPM, analysis. e. All of the statements above are discussed in the text as methods for analyzing risk in capital budgeting. Question 9 Marks: 1 Which of the following statements is most correct? Choose one answer. a. All of the statements are correct b. Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects. c. There are two correct statements. d. One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of certain effects occurring, whereas scenario analysis does not consider probabilities. e. Simulation analysis is a computerized version of scenario analysis that uses continuous probability distributions of the input variables. Question 10 Marks: 1 Which of the following statements is not correct? Choose one answer. a. All of the statements are correct. b. One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of certain effects occurring, whereas scenario analysis does not consider probabilities. c. Simulation analysis is a computerized version of scenario analysis that uses continuous probability distributions of the input variables.

d. Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects. Question 11 Marks: 1 Which of the following statements is not correct? Choose one answer. a. In comparing two projects using sensitivity analysis, the one with the steeper lines would be considered less risky, because a small error in estimating a variable, such as unit sales, would produce only a small error in the projects NPV. b. Sensitivity analysis is incomplete because it fails to consider the range of likely values of key variables as reflected in their profitability distributions. c. There are two correct statements d. Sensitivity analysis is a risk analysis technique that considers both the sensitivity of NPV to changes in key variables and the likely range of variable values. e. 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 using a PC with a spreadsheet program or even a calculator. Question 12 Marks: 1 Which of the following statements is correct? Choose one answer. a. Sensitivity analysis is a risk analysis technique that considers the sensitivity of NPV to changes in key variables. b. 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 using a PC with a spreadsheet program or even a calculator. c. Sensitivity analysis is complete because it succeed to consider the range of likely values of key variables as reflected in their probability distributions. d. In comparing two projects using sensitivity analysis, the one with the steeper lines would be considered less risky, because a small error in estimating a variable, such as unit sales, would produce only a small error in the projects NPV. Question 13

Marks: 1 Monte Carlo simulation Choose one answer. a. There are two correct statements b. Produces both an expected NPV (or IRR) and a measure of the riskiness of the NPV or IRR. c. Is capable of using profitability distributions for variables as input data instead of a single numerical estimate for each variable. d. All of the statements are correct. e. Can be useful for estimating a projects stand-alone risk. Question 14 Marks: 1 Lieber Technologies is considering two potential projects, X and Y. In assessing the projects risk, the company has estimated the beta of each project and has also conducted a simulation analysis. Their efforts have produced the following numbers: Project X Project Y Expected NPV $350,000 $350,000 St.dev.(NPV) $100,000 $150,000 Estimated project beta 1.2 1.8 Probability(Monte Carlo)5% 5% Which of the following statements is most correct? Choose one answer. a. Project X has a higher level of stand-alone risk relative to Project Y. b. None of the statements is correct. c. Project X has higher level of simulation risk relative to Project Y. d. Project X has a higher level of corporate risk relative to Project Y. e. Project X has a higher level of market risk relative to Project Y. Question 15 Marks: 1 Lieber Technologies is considering two potential projects, X and Y. In assessing the projects risk, the company has estimated the beta of each project and has also conducted a simulation analysis. Their efforts have produced the following numbers:

Project X Project Y Expected NPV $350,000 $350,000 St.dev.(NPV) $100,000 $150,000 Estimated project beta 1.2 1.8 Probability(Monte Carlo)5% 6% Which of the following statements is most correct? Choose one answer. a. All of the statements above are correct. b. Project X has a higher level of corporate risk relative to Project Y. c. Project X has a higher level of stand-alone risk relative to Project Y. d. Project X has a lower level of market risk relative to Project Y. Nguyn Hnh Dung dungnhfb60191