Which of the Following Statements Is Correct Concerning Various Techniques

question 24

Multiple Choice

Which of the following statements is correct concerning various techniques used for assessing a capital budgeting project's stand-alone risk?

• A)Sensitivity analysis fails to consider the range of likely values for the key input variables that are used to evaluate a capital budgeting project.
• B)When using sensitivity analysis, the sensitivity of input variables can be compared by graphing their relationships with such measures as net present value (NPV) and internal rate of return (IRR). When comparing two of the variables, the variable that has the graph with the steeper line (slope) is considered less risky than the graph with the flatter line.
• C)The primary advantage of using simulation analysis to evaluate a capital budgeting project is that it provides an accurate point (single) estimate of the project's net present value (NPV).
• D)Compared to scenario analysis, one important benefit of using simulation analysis to evaluate a capital budgeting project is that once the analysis is complete, simulation provides a clear accept/reject decision rule.
• E)When using simulation analysis to evaluate a capital budgeting project, only a few discrete alternative scenarios are included.

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Definitions:

FIFO

FIFO (First In, First Out) is an inventory valuation method where the oldest inventory items are recorded as sold first.

Fair Value

The estimated market value of an asset or liability, based on current market prices.

Cost of Goods Sold

An accounting term that represents the direct costs attributable to the production of the goods sold by a company.

Ending Inventory

The cumulative monetary value of products available for selling by the close of a fiscal period.