Which of the Following Statements Is Correct

question 61

Multiple Choice

Which of the following statements is correct?

• A) Sensitivity analysis is incomplete because it fails to consider the range of likely values of key variables as reflected in their probability distributions.
• B) 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 project's NPV.
• 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 using a PC with a spreadsheet program or even a calculator.
• 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) Answers c and d are correct.

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Definitions:

Depreciation Expense

The allocated portion of the cost of a tangible or physical asset that is charged as an expense over its useful life.

Operating Activities

Activities directly related to the business's primary operations, such as selling products or services, which are reflected in the company's cash flow.

Net Income

Net income is the total profit a company generates after subtracting all its expenses, taxes, and losses from its total revenue.

Operating Activities

Activities that constitute the primary or main activities of an entity, including the production, sales, and delivery of the company’s product as well as collecting payment from its customers.