What is the main purpose of sensitivity analysis in capital budgeting?
Correct answer: A. To test how results change when assumptions change
- A. To test how results change when assumptions change
- B. To remove all project risk
- C. To calculate historical accounting profit
- D. To determine the legal ownership of assets
Explanation
Sensitivity analysis examines how changes in assumptions, such as sales volume or discount rate, affect a project's outcome. It does not eliminate risk, but it shows which assumptions have the greatest influence.
Report an error
The more specific you are, the faster it gets fixed. A source beats an opinion.
Prefer email? [email protected]
About Business Finance
Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
Practise Business Finance
975 free Business Finance MCQs from Management Sciences, each with the correct answer and an explanation. Unlimited attempts, no account needed.
Discussion
Stuck on an option, or know a faster way to get there? Ask or explain it here.
No comments yet. Be the first to explain this one.
Exams that ask Management Sciences questions like this
Management Sciences is on 2 papers prepared for on TestUstad, and all of them draw the same bank, so this question is worth knowing for every one of them.
More Business Finance questions
In capital budgeting, capital rationing occurs when a company:
Using the dividend growth model, what is the cost of equity if the expected dividend next year is Rs. 6, the current share price is Rs. 75 and the constant growth rate is 4%?
A company has earnings before interest and tax of Rs. 600,000 and annual interest expense of Rs. 150,000. What is its interest coverage ratio?
Under a residual dividend policy, a company normally pays dividends from:
A business has total assets of Rs. 2,400,000 and total liabilities of Rs. 1,500,000. What is the value of its owners' equity?
What will be the future value of Rs. 100,000 invested for two years at an annual compound interest rate of 10%?