Chapter 10, Problem 1QP

a.

Summary Introduction

To match: The correct term for the definition in option (a).

Explanation of Solution

Process of recalculating a project’s net present value by changing numerous inputs to the new values is called scenario analysis.

Hence, the correct term for the definition in option (a) is scenario analysis.

b.

Summary Introduction

To match: The correct term for the definition in option (b).

Explanation of Solution

Option to modify a project at a future date is called real option.

Hence, the correct term for the definition in option (b) is Real option.

c.

Summary Introduction

To match: The correct term for the definition in option (c).

Explanation of Solution

Analysis of how project NPV changes if various norms are made about sales, costs, and other key variables is called sensitivity analysis.

Hence, the correct term for the definition in option (c) is sensitivity analysis.

d.

Summary Introduction

To match: The correct term for the definition in option (d).

Explanation of Solution

The degree to which the fixed costs increase the effect of decrease in sales on company’s profits is called operating leverage.

Hence, the correct term for the definition in option (d) is operating leverage

e.

Summary Introduction

To match: The correct term for the definition in option (e).

Explanation of Solution

Graphical approach for showing probable future events and the response to the future event is called decision tree.

Hence, the correct term for the definition in option (e) is decision tree.

f.

Summary Introduction

To match: The correct term for the definition in option (f).

Explanation of Solution

Break even analysis helps in determining the level of sales at which the future sales will break even the cost of production.

Hence, the correct term for the definition in option (f) is Break even analysis.