Which of the Following Statements Is CORRECT

question 55

Multiple Choice

Which of the following statements is CORRECT?

• A) Sensitivity analysis as it is generally employed is incomplete in that it fails to consider the probability of occurrence of the key input variables.
• 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 efficiently using a PC with a spreadsheet program or even with just a calculator.
• D) 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.

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Definitions:

Indirect Labor

Labor costs of employees who assist in the production process but do not directly work on the production of goods or services.

Factory Overhead

Factory overhead refers to the indirect costs associated with manufacturing, including utilities, maintenance, and management salaries.

Indirect Materials

Materials used in the production process that cannot be directly linked to a specific product, such as lubricants for machines.

Indirect Cost

Expenses that are not directly attributable to a specific business activity or product, such as overhead costs like utilities or rent.