The Use of Sensitivity Analysis Requires That _____

question 41

Multiple Choice

The use of sensitivity analysis requires that _____.

• A) all variables affecting NPV be defined
• B) probability distributions of the determinants of a project's cash flows be estimated
• C) the firms have access to a very large computer
• D) the firm is greatly interested in the portfolio risk reduction characteristics of a project

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Definitions:

Variable and Fixed Costs

Variable costs change based on production levels, while fixed costs remain constant regardless of production volume.

Fixed Factory Overhead Costs

Expenses related to the operation of a manufacturing facility that remain constant regardless of the production volume.

Absorption Costing

A method of inventory costing that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.

Cost of Products Manufactured

The total expense incurred by a company to produce goods over a specific period, including costs associated with materials, labor, and overhead.