CHAPTER 9Risk Analysis, Real Options, and Capital BudgetingMultiple Choice Questions:I.DEFINITIONSSCENARIO ANALYSISb1.An analysis of what happens to the estimate of the net present value when you examine a number of different likely situations is called _ analysis.a.forecastingb.scenarioc.sensitivityd.simulatione.break-evenDifficulty level: EasySENSITIVITY ANALYSISc2.An analysis of what happens to the estimate of net present value when only one variable is changed is called _ analysis.a.forecastingb.scenarioc.sensitivityd.simulatione.break-evenDifficulty level: EasySIMULATION ANALYSISd3.An analysis which combines scenario analysis with sensitivity analysis is called _ analysis.a.forecastingb.scenarioc.sensitivityd.simulatione.break-evenDifficulty level: EasyBREAK-EVEN ANALYSISe4.An analysis of the relationship between the sales volume and various measures of profitability is called _ analysis.a.forecastingb.scenarioc.sensitivityd.simulatione.break-evenDifficulty level: EasyVARIABLE COSTSa5.Variable costs:a.change in direct relationship to the quantity of output produced.b.are constant in the short-run regardless of the quantity of output produced.c.reflect the change in a variable when one more unit of output is produced.d.are subtracted from fixed costs to compute the contribution margin.e.form the basis that is used to determine the degree of operating leverage employed by a firm.Difficulty level: EasyFIXED COSTSb6.Fixed costs:a.change as the quantity of output produced changes.b.are constant over the short-run regardless of the quantity of output produced.c.reflect the change in a variable when one more unit of output is produced.d.are subtracted from sales to compute the contribution margin.e.can be ignored in scenario analysis since they are constant over the life of a project.Difficulty level: EasyACCOUNTING BREAK-EVENc7.The sales level that results in a projects net income exactly equaling zero is called the _ break-even.a.operationalb.leveragedc.accountingd.cashe.present valueDifficulty level: EasyPRESENT VALUE BREAK-EVENe8.The sales level that results in a projects net present value exactly equaling zero is called the _ break-even.a.operationalb.leveragedc.accountingd.cashe.present valueDifficulty level: EasyII.CONCEPTSSCENARIO ANALYSISb9.Conducting scenario analysis helps managers see the:a.impact of an individual variable on the outcome of a project.b.potential range of outcomes from a proposed project.c.changes in long-term debt over the course of a proposed project.d.possible range of market prices for their stock over the life of a project.e.allocation distribution of funds for capital projects under conditions of hard rationing.Difficulty level: EasySENSITIVITY ANALYSISb10.Sensitivity analysis helps you determine the:a.range of possible outcomes given possible ranges for every variable.b.degree to which the net present value reacts to changes in a single variable.c.net present value given the best and the worst possible situations.d.degree to which a project is reliant upon the fixed costs.e.level of variable costs in relation to the fixed costs of a project.Difficulty level: EasySENSITIVITY ANALYSISc11.As the degree of sensitivity of a project to a single variable rises, the:a.lower the forecasting risk of the project.b.smaller the range of possible outcomes given a pre-defined range of values for the input.c.more attention management should place on accurately forecasting the future value of that variable.d.lower the maximum potential value of the project.e.lower the maximum potential loss of the project.Difficulty level: MediumSENSITIVITY ANALYSISc12.Sensitivity analysis is conducted by:a.holding all variables at their base level and changing the required rate of return assigned to a project.b.changing the value of two variables to determine their interdependency.c.changing the value of a single variable and computing the resulting change in the current value of a project.d.assigning either the best or the worst possible value to each variable and comparing the results to those achieved by the base case.e.managers after a project has been implemented to determine how each variable relates to the level of output realized.Difficulty level: MediumSENSITIVITY ANALYSISd13.To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably conduct _ analysis.a.leverageb.scenarioc.break-eve