A Firm's Managers Realize They Cannot Monitor All Aspects of Their

question 27

Multiple Choice

A firm's managers realize they cannot monitor all aspects of their projects but do want to maintain a constant focus on the key aspect of each project in an attempt to maximize their firm's value. Given this specific desire, which type of analysis should they require for each project and why?

• A) Sensitivity analysis; to identify the key variable that affects a project's profitability
• B) Scenario analysis; to guarantee each project will be profitable
• C) Cash breakeven; to ensure the firm recoups its initial investment
• D) Accounting breakeven; to ensure each project earns its required rate of return
• E) Financial breakeven; to ensure each project has a positive NPV

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Definitions:

Held-for-Collection Investments

Investments acquired with the intention of holding them to collect their contractual cash flows, rather than for selling in the near term.

Equity Method

An accounting technique used for recording investments in associate companies where the investor has significant influence over the investee.

Carrying Value

The book value of an asset on a company's balance sheet, derived from its original cost minus accumulated depreciation or amortization.

Net Income

The total profit of a company after all expenses, including taxes and operating costs, have been deducted from total revenues.