Question

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.

Answer 1

Answer:

A)

Explanation:

For this specific desire of the company, they should focus on Sensitivity analysis, in order to identify the key variable that affects a project’s profitability. Sensitivity analysis focuses on determining how a target variable is affected based on changes in other known variables. This allows a company to tweak and determine which changes will have the greatest positive outcome for each specific project that they are working on.