There are various advantages and disadvantages of sensitivity analysis, and it provides a solution to different business problems under different situations. The return, Which of the following results in an over-funded defined benefit pension plan? When is simulation analysis commonly used? This textbook can be purchased at www.amazon.com, The Solar Calculator Company proposes to invest $5 million in a new calculator-making plant. a. [1] [2] [3] Spreadsheets were developed as computerized analogs of paper accounting worksheets. A solar calculator costs $5 per unit to manufacture and sells for $20 per. Councilor Miles says it is worth it to society only if suppliers lower their costs to the city for the inputs to the project. The following are drawbacks of sensitivity analysis EXCEPT A it can provide from FIN FIN-324 at Binghamton University c. can be mutually exclusive under certain conditions. 8. Note: You may assume that fractional rentals are okay, so if your solution says to rent 140.6 computers for one month we can round this up or down (to 141 or 140) without having much effect on the total cost. annual sales? Shipping and installation would cost an additional, Suppose the current price of gold is $650 per ounce. This analysis is useful because it improves the prediction of the model, or . B) Having advance notice of when your, In general, underwriters receive lower spreads for which of the following? Ted suffers from which one of the f, Pro forma financial statements are used to: A) find the contribution margin B) show the results of some assumed event C) predict the sensitivity of different output variables D) show the results of an actual event, The kind of analysis that consists of rerunning the model to determine the effect on the output variables of changes in the input variables is: A) simulation B) scenario analysis C) sensitivity analysis D) probabilitistic analysis, The main advantage of deterministic models is that they: A) provide the user with more useful information than other models B) allow the user to maximize some objective function C) allow the user to perform sensitivity analyses quickly D) allow the user t, The primary difference between sensitivity analysis and risk analysis is: a. Liquidation and reorganization c.Leasing and LBO d.Issue stocks and bonds 2.A, Company X has 100 shares outstanding. Sensitivity analysis (SA), in the most general sense, is the study of how the 'outputs' of a 'system' are related to, and are influenced by, its 'inputs'. Assume no taxes.) Retirement benefits b. Is S, Thomas bought a residential house and lot from BDC Realty for P250,000.00 giving a down payment of P10,000.00 and promising to pay the balance of P240,000.00 in 20 years in monthly installments of. The following are drawbacks of sensitivity analysis except: A. it provides ambiguous results. (Assume that revenues and costs occur at the end of each year. However, the selection of either one of these eliminates the option of selecting the other project. B. lowering price or offering incentives to profitable customers. Project analysis, beyond simply calculating NPV, includes the following, Petroleum Inc. (PI) controls offshore oil leases. taxes.) View the full answer. Sensitivity analyses are commonly employed in the context of trading, because they help traders understand how sensitive stock prices are to different factors. C. giving incentives to all customers to place orders online. Some of these ventures a, [The following information applies to the questions displayed below.] A creative community for animated pictures and . 7 D3b. level (i.e., NPV = 0) of annual sales? it can help identify the project 's most important variables . Sampling-based sensitivity analysis by scatterplots. Study Resources. Use the below information to answer the following questions: | |2007 |2008 |Sales| $2870| $3080 |Depreciation| 413| 413 |Cost of goods sold| 987| 1121 | Other Expenses |238| 196 | Interest| 192|, [{Blank}] is the statistical technique that helps the analyst classify observations (firms) into two or more predetermined groups based on certain characteristics of the observation. Strong-form market efficiency states that the market incorporates all information into stock, prices. It earns $1,000 per year and expects to pay all of it as dividends. The price of oil is $100/bbl. 6. Hraxin Co is appraising an investment project which has an expected life of four years and which will not be repeated. A. If the plant lasts for three years, and the cost of capital is 12%, what is the break-even level (i.e., NPV = 0) of. Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. All other trademarks and copyrights are the property of their respective owners. The following are drawbacks of sensitivity analysis EXCEPT: A. it can provide ambiguous results. Double click on ScanCode Map and enter the following value data: 00 00 00 00 00 00 00 00 02 00 00 00 00 00 3A 00 00 00 00 00. B. managers are more likely to waste funds in unprofitab, Negative aspects of using credit include which of the following? 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Sometimes one approach will be much easier than the other. The following are drawbacks of sensitivity analysis except: A. it provides ambiguous results. extraction costs are $50/bbl. If the plant lasts for three years and the cost of capital is 12%, what is the break-even level (i.e., NPV = 0) of annual sales? A) Deterministic analysis B) Sensitivity analysis C) Discriminant analys, In addition to direct costs, there are other costs associated with new security offerings.These other costs include all of the following except: A)the cost of incentives such as the "Green Shoe" option B)the cost of overpricing C)the cost of stock price d. Customer profitability analysis might result in: A. dropping some customers that are unprofitable. C. Pichery, in Encyclopedia of Toxicology (Third Edition), 2014 Sensitivity Analysis: Definition and Properties. It examines the extent to which the uncertainty of each project element affects the objective being examined when all other uncertain elements are held at their baseline values. B. underlying variables are likely to be interrelated. Two city councilors are debating whether to pursue a new project. Your boss has asked you to perform a comprehensive analysis of the company?s financi, 1. Objective decision models have proven to generally _______. Previous question Next question. Diversification can help eliminate individual company risk. C. it provides additional information about the project that is useful. Buyer bought a house and lot with ABC DEvt. Sensitivity analysis is a valuable financial tool that provides new and increased information about the project Our experts can answer your tough homework and study questions. Providing computer records B. GM Corporation is being acquired by BKF Ltd for R1 290 000 worth of BKF Ltd shares. Management conducted a full risk analysis of these t, In high-growth industries where companies' internally generated funds fall short of profitable investment opportunities, ______. School Vanderbilt University; Course Title FNEC 104155; Uploaded By ElderMorning3068; Fringe benefits Prepare a report with the following information: -Outline the concept and objectives of fringe benefits -Benefits to employees -Benefits to employers -Fringe Benefits Tax (FBT) and c, Use the following information for calculating different ratios and also analyzing trends|Particulars|2015|2016 |Sales|200|220 |Variable costs|100|110 |Fixed costs|80|80 |Net income|20|30 |Dividend, Understanding risks that affect projects and the impact of risk consideration Garcia Real Estate is involved in commercial real estate ventures throughout the United States. A reduction in the fee equivalent to the profit made on the trade II. Round to the nearest 1,000 units. copyright 2003-2022 Homework.Study.com. by Z1, Z2, Z3, Z4 in turn. The following are drawbacks of sensitivity analysis EXCEPT: the underlying variables are likely interrelated. The difference between the two methods is that sensitivity analysis examines the effect of changing just one variable at a time. A. diversification, taxes, high initial investments B. low initial investments, professional management, diversification C. liquidity, high initial investments, diversification D. profes, A successful lease agreement is created so that both the lessee and lessor reap some benefits. Spreadsheet. Provide a situation that reflects a stronger desire to avoid a loss than to make a gain. Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. How useful is sensitivity analysis? Thus the external purchase price only needs to increase by $1 per unit (or $1/ $6 = 17%). Sensitivity analysis can predict the outcomes of an event given a specific range of variables, and an analyst can use this information to understand how a change in one variable affects the other variables or outcomes. High earnings quality is most likely to: A. result in steady earnings growth. True positive: the person has the disease and the test is positive. d. always have negative NPVs. (Assume that revenues and costs occur at the end of each year. Fixed/variable 2. decreased/increased 3. increased/decreased While the agency conflicts between managers and shareholders tend to receive the most press, Firms often involve themselves in projects that do not result directly in profits. It indicates how sensitive a project's NPV or IRR is to changes in particular variables. Want to read all 10 pages? Not be worth the time and effort b. assign a score of high, moderate, or low to each option. Which of the following statements is false? Sensitivity analysis frequently uses in both business . B) These investments determine the long-t. There are three forms of the Efficient Market Hypothesis: weak, semi-strong, and. C. The use of credit oft, _____ is a procedure that allows us to predict an individual s score on one variable based on knowing one or more other variables. He provided you with the following information for the beginning and the end of the year: Which of the following statements is correct? Ongoing supplier assessment is generally unrelated to the supplier selection process. Sensitivity analysis is a financial modelling tool used to analyse how different values of an independent variable affect a particular dependent variable under a certain set of assumptions. The following are drawbacks of sensitivity analysis except a it can provide from FINANCE 544 at Swat College of Science & Technology, Mingora Merger and acquisition b. (a) frequently, it is difficult to specify precisely the relationship between a particular variable and net present value; - Identifies variables that may have the greatest potential impact on profitability and allows management to focus on these variables, under sensitivity analysis, the process used to determine profitability at various levels of sales. A project requires an initial investment of $200,000 and is expected to produce revenues less costs (R-C) of 120,000 per year for 2 years (that is, at t = 1 and t = 2). Following information for Golden Fleece Financial: Long-term debt outstanding $380,000 Bond rating AAA Current yield to maturity (r D ): 7% Number of shares of common stock: 14,000 Price per share: 16. After SARs and, All of the following are benefits derived from short-term financial planning with the exception of: A) Having the ability to time capital expenditures in order to place the least financial burden possible on a firm. Your boss is expecting you to complete a comprehensive, analytical, response to this project (details to follow) . Calculate. Which one of the following terms best. DeBondt and Thaler (1990) argue that the P/E effect can be explained by: a. forecasting errors and earnings expectations that are too extreme. c. Diversification lowers bo, Assume health care services provider Gilead Sciences Inc. (GILD) has sensitivity to market returns of 1.5, a small-minus big (SMB) factor sensitivity of 2, and a high minus low book value (HML) factor, You currently manage Cody's investment portfolio. Range of break even analysis for each variable suggests: can modify additional variable of the model based on elasticity / inter-relationships identified between variables. Established in 2008, Gifthong is. End of preview. [4] The program operates on data entered in cells . The Financial Calculator Company proposes to invest $12 million in a new calculator-making plant. All rights reserved. Projected investment results are less than actual B. First, because the variables are all based on historical data, the outcomes are based on assumptions. Fixed costs are $2 million per year. Briefly describe each of the following: a. A method that forecasts the results of a decision when the related circumstances change compared to the significant predictions is known as sensitivity analysis. It includes the effects that change in interest rates have on the bond prices. ADVANTAGES AND DISADVANTAGES OF SENSITIVITY ANALYSIS Advantages 1. B. It is considering the construction, of a deep-sea oil rig at a cost of $500 million. C. it provides additional information about the project that is useful. If these assumptions themselves are wrong, the whole analysis will be wrong, and the future forecast will not be accurate. On the other hand, scenario analysis assesses the effect of changing all the input variables at the same time. Survivor benefits c. Disability benefits, You analyze the prospects of several companies and come to the following conclusions about the respected return on each |Stock |Expected Returns |Starbucks |18% |Sears |8% |Microsoft |16% |Limite, Allied Managed Care Company is evaluating two different computer systems for handling provider claims. C) a decrease in value with a decrease in vacancies. A) These investment decisions determine whether the firm will add value for its owners. D. all of these statements are drawbacks of sensitivity analysis. B. the underlying variables are likely interrelated. He has paid an amount of P2M already for a period of seven years. Find Mafia stock images in HD and millions of other royalty-free stock photos, illustrations and vectors in the Shutterstock collection. The historical returns data for the past three years for Dryships (DRYS) and the NASDAQ market portfolio are: Dryships: 24%, 0%, 24%, NASDAQ Market Portfolio: 10%, 12%, 20%. The initial investment, payable at the start of the first year of operation, is $5 million. Southern Goods is analyzing a proposed project using standard sensitivity analysis. D. all of the above statements are drawbacks of sensitivity analysis. b. Keeping earnings above the same period in the prior year. Perform worse than judgment and intuition c. Outperform judgement and intuition d. Be too difficult to implement. $$. Brilliante Pens, a 125-year-old pen manufacturer, markets very high-quality pens, many of which cost more than $1,000 each, to executives globally, always maintaining its reputation of superior value in its narrow market. d. ex, An investment adviser plans to sell securities out of its own investment account to an advisory client. Independent projects: a. do not compete with each other. Use the following ratio information for Johnson International and the industry averages for Johnson's line of business: Indicate in which areas Johnson requires further analysis. Because it's more in-depth, the predictions may be far more reliable. sensitivity analysis is a technique used to determine how different values of an independen . C. it provides additional information about the project that is useful. Strong-form efficiency implies that. A sensitivity analysis can isolate certain variables and show the range of outcomes. In order to do so, which of the following is required? Payment Card Industry Data Security Standard, Organizational studies and human resource management. Fixed, costs are $2 million per year. a. Enhancement of the manager's career. The historical returns for the past three years for Stock B and the stock market portfolio were Stock B: 24 percent, 0 percent, 24 percent; market portfolio: 10 percent, 12 percent, 20 percent. Suppose $x \in \mathbb{Z}$. c. Finance professionals make decisions that fall into three distinctive areas: corporate finance, capital markets, and investments. Which of the below is considered an input in the systems thinking example of a TPS? It is used to visualize and extract information from financial statements. All of these statements are drawbacks of sensitivity analysis. If the firm expects to maintain this dividend forever, calculate the stock price after the, Good day Please help with the following question am struggling with? Get access to this video and our entire Q&A library, Sensitivity Analysis: Definition, Uses & Importance. 9. Most likely, the coefficien, Although there is no empirical evidence to strongly support this hypothesis, some financial journalists have claimed that American managers are shortsighted and overly risk-averse, preferring to take on relatively safe projects that pay off quickly instea. Should we invest in gold or T-bills? You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. The price of gold is expected to grow at 5 percent per year for the foreseeable future. The corporate tax rate is 30%. To use Excel to generate a normally distributed random variable, you must know the mean and standard deviation of the distribution and have a random number between 0 and 1. Company financials. expected. Which type of analysis is she using? the underlying variables are likely interrelated. Consent of the client b. BKF has 75 000 shares outstanding at, Mr. If the external purchase price rose by more than 17% the original decision would be reversed. Scrap value of $500,000 is expected to arise at the end of four years. Sensitivity analysis is a method to find out how the unpredictability in the results of a system or model can be alloted to different sources of unpredictability in its inputs. One of the biggest drawbacks of sensitivity analysis is how heavily it relies on the assumptions of an imperfect analyst, who then builds a financial model that business leaders will use to make crucial decisions that could reshape an entire company's fortunes. the following are drawbacks of sensitivity analysis except it provides addtional from FINC 6001 at The University of Sydney This means there's potential for mistakes when applying the Analysis to future predictions because it's not perfectly correct. Organizational studies and human resource management. Conflict resolution and conflict management are common day-to-day activities in most projects and office environments. 10. Sensitivity analysis is performed using the following formula: S = (d x / x )/ (d p / p) ( Jorgensen, 1994 ), where S = sensitivity, x = state variable, P = parameter, d x and d p are change of values of state variables, parameters, and forcing functions, respectively, at 10% level in temporal scale. Assume no taxes.) Using trial and error, it becomes necessary to use an IRR that . They both require a $5 million investment today and have expected NPVs of $1,000,000. It costs $100 to rent a supercomputer for one month,$180 for two months, and $250 for three months. for a change in component values up to their tolerance limits. A spreadsheet is a computer application for computation, organization, analysis and storage of data in tabular form. Identify the top 5 sources of conflict in a BPO agreement for project management, Which of the following is NOT a reason why a firm's financial managers must take great care when making investment decisions? We are going to invest $1,000 for a period of 6 months Two potential investments are available: T-bills and gold If the$1,000 is invested in T-bills, we are certain to end the 6-month period with $1,296. The typical display of results is in the form of a tornado diagram. all of these statements are drawbacks of sensitivity analysis. The more sensitive the NPV, the more critical is the variable. In a numerical (or otherwise) model, the Sensitivity Analysis (SA) is a method that measures how the impact of uncertainties of one or more input variables can lead to uncertainties on the output variables. Identif, All of the following are characteristics of traditional defined benefit pension plans EXCEPT for: a) employees assume the risk of poor investment results b) they are complex to design and operate c) benefits are guaranteed by the Pension Benefit Guaranty, The analysis likely includes incorrect and misleading conclusions. B) a decrease in vacancies. Because the moon moves relative to the earth so that it returns to the same position overhead after about 25 hours, there are two high and two low tides at any point every 25 hours. Common terms. A. managers are less likely to waste funds in unprofitable projects. 11. Could the following be a direct cause of financing feedback? The IRS has determined that during each of the next 12 months it will need the number of supercomputers given in Table 45. c) It can be used, Anytime Ted analyzes a proposed project, he always assigns a much higher probability of success to the project than is warranted by the information he has gathered. Prove the following statements using either direct or contrapositive proof. Course Hero is not sponsored or endorsed by any college or university. b. experienced large gains. A data processing analyst for a research supplier finds that preliminary co. Social security can be justified on the grounds of: a) adverse selection. The following are drawbacks of sensitivity analysis except: A. it provides ambiguous results. Determine the rental plan that meets the next 12 months requirements at minimum cost. Tax and depreciation write-offs are some critical reasons for leasing, but there are several other qualitative reasons for leasing. Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. Projected investment results are greater than estimated C. Higher administrative fees than expected D. Lower employe, This chapter demonstrated that the requirement that new projects be accretive to firm's EPS sometimes results in accepting negative-NPV projects and rejecting positive-NPV projects.However, under more, This chapter demonstrated that the requirement that new projects be accretive to firm EPS sometimes results in accepting negative-NPV projects and rejecting positive-NPV projects. Magoosh GRE, Common & Advanced 1000+ Words Magoosh GRE, Common & Advanced 1000+ Words Unnerve Verb: to make nervous or upset Synonyms: enervate, faze , unsettle At one time unnerved by math problems, she began avidly "Magoosh-ing", and soon became adept at even combinations and permutations questions. Principal Component Analysis (PCA) is a statistical techniques used to reduce the dimensionality of the data (reduce the number of features in the dataset) by selecting the most important features that capture maximum information about the dataset. Fixed costs are $3 million per year. and. It studies how various sources of uncertainty contribute to the forecast's overall uncertainty by posing 'what if' questions. In management accounting, we use it to calculate the change of company net profit if other factors change. Best Answer. The following are drawbacks of sensitivity analysis except: A. it provides ambiguous results. D. all of these statements are drawbacks of sensitivity analysis. B. improve the ability to predict future earnings. \begin{matrix} \text{Month} & \text{Computer Requirements}\\ \text{1} & \text{800}\\ \text{2} & \text{1,000}\\ \text{3} & \text{600}\\ \text{4} & \text{500}\\ \text{5} & \text{1,200}\\ \text{6} & \text{400}\\ \text{7} & \text{800}\\ \text{8} & \text{600}\\ \text{9} & \text{400}\\ \text{10} & \text{500}\\ \text{11} & \text{800}\\ \text{12} & \text{600}\\ \end{matrix} Diversification lowers both, Ratio Analysis allows a firm to compare its performance to: a) other firms in the industry b) other time periods within the firm c) other industries d) none of the above, A licensee subject to an investigation or examination may not engage in any of the following, except: A. It helps the decision-makers of a business to learn about the different parameters that drive a business. Which of the following is least likely to be a motivation for managers to issue financial reports of low quality? The following are drawbacks of sensitivity analysis. A quantitative risk analysis and modeling technique used to help determine which risks have the most potential impact on the project. First, it acts as an in-depth study of all the variables. There are also some disadvantages to relying on sensitivity analysis: (-) Outcomes are all based on assumptions on top of historical data, which makes them susceptible to being incorrect; (-) Looking at each factor individually, doesn't allow us to analyze the interaction and correlation between variables, as well as any effect it may have. 7. One company in the portfolio of companies you are analyzing is a C. Data editing deals with detecting and correcting illogical, inconsistent, or illegal data in the information returned by the participants of the study. After the sale, the car broke down due to engine trouble requiring an overhaul of the engine. Mathematically, the dependent output formula is represented as, Z = X2 + Y2 I. Below you are given a partial Excel output based on a sample of 25 observations. If the plant lasts for four years and the cost of capital is 20%, what is the break-even. Anusha is a financial analyst in RTE Telecom Inc. As part of her analysis of the annual distribution policy and its impact on the firm's value, she makes the following calculations and observations: Fill in the blanks using the following: . b. earnings expectations that are not extreme enough. generally used for large projects where size of investment justifies cost of developing simulation model), Advantages and disadvantages of Decision Tree Analysis, +allows management to take into account sequence of decisions overtime (forces consideration of future investment decisions). Createyouraccount. The following are drawbacks of sensitivity analysis except: B. underlying variables are likely to be interrelated. 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