What is the main purpose of sensitivity analysis in capital budgeting?
Correct answer: B. To test how results change when assumptions change
- A. To remove all project risk
- B. To test how results change when assumptions change
- 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.
Last updated
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
80 free Business Finance MCQs from Management Sciences, each with the correct answer and an explanation. Unlimited attempts, no account needed.
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.
Related questions
A bond with a face value of Rs. 1,000 pays annual interest of Rs. 80 and currently sells for Rs. 800. What is its approximate current yield?
A business has annual fixed costs of Rs. 300,000, a selling price of Rs. 50 per unit and variable cost of Rs. 30 per unit. What is its break-even output?
A business has sales of Rs. 1,000,000 and variable costs of Rs. 600,000. What is its contribution margin ratio?
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?
A company deposits Rs. 100,000 at the end of each year for three years in an account earning 10% annually. What is the approximate value of these deposits at the end of the third year?