Question

This is an old test we took and I would just like some clarification on what the answers were and why. thanks! (Also to eliminate comfusion its a study abroad course so questions are asking in euros)

10. Sensitivity analysis and Scenario analysis are methods that: a) Deal with risk that comes from the project cash flows. b) Deal with risk that comes from the project opportunity cost of capital. c) Plot the NPV as a function of the discount rate d) Study the minimum number of units the company has to sell to get positive NPV. Please, read this paragraph these simple and mutually exclusive projects: to answer questions 11, 12 and 13: R+C Inc, is going to invest in one of Project B Project A NPV (at discount rate 0%)- NPV (at discount rate 20% ) - 594.37 IRR- 41.04 % 1,480 NPV (at discount rate 0%) NPV (at discount rate 20% ) - 800.93 IRR- 78.22% 1,800 Fisher's rate (crossover rate)- 9.39 % 11. In case the minimum required return for these investments is 15% , what is the best project for R+C? a) Project A. b) Project B c) Both projects are equally good for R+C d) We do not have enough information to answer this question. In case the opportunity cost of capital for these investments is 7%, what is the best project for R+C? 12 a) Project A b) Project B c) Both projects are equally good for R+C. d) We do not have enough information to answer this question. 13. A Fisher's rate (crossover rate) of 9.39% represents: a) The discount rate that makes NPVA=NPVB b) The IRR of the incremental investment B-A c) The discount rate that makes projects A and B equally valuable for R+A d) All of the above.

Answer 1

Only one questions will be answered and multiple questions cant be answered as per the instructions.

Answer

Q.10

c) Plot the NPV as the function of a discount rate

Explanationa:

A conduct sensitive analysis take a certain variable involved in a potential investment and change it in order to see how that change would effect the overall investment.

Scenario analysis can be thought of as performing multiple sensitivity analysis at the same time