Sensitivity Analysis Determines The

question 3

Multiple Choice

Sensitivity analysis determines the:

• A) range of possible outcomes given that most variables are reliable only within a stated range.
• B) degree to which the net present value reacts to changes in a single variable.
• C) net present value range that can be realized from a proposed project.
• D) degree to which a project relies on its initial costs.
• E) ideal ratio of variable costs to fixed costs for profit maximization.

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Definitions:

Sensitivity Analysis

A technique in financial modeling used to determine how different values of an independent variable affect a particular dependent variable under a given set of assumptions.

Variable Costs

Costs that vary directly with the level of production or volume of sales, such as materials and labor.

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance premiums, providing stability to a company's expense structure.

Depreciation Expense

The allocated amount of the cost of an asset that is written off as an expense over its useful life.