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:

Fixed Assets

Long-term tangible assets held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as buildings, machinery, and land.

Capital Expenditures Budget

A financial plan dedicated to the projected spending on long-term assets that will deliver value in the future.

Sales Budget

An estimation of the revenue expected from sales activities over a certain period, used for financial planning and strategy.

Capital Expenditures Budget

A plan for the funds a company intends to spend on major physical assets, aimed at future benefits or investments.