ECN 104 Study Guide - Scenario Analysis, Marginal Revenue, Sensitivity Analysis

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Lo1 how to perform and interpret a sensitivity analysis for a proposed investment. Lo2 how to perform and interpret a scenario analysis for a proposed investment. Lo3 how to determine and interpret cash, accounting, and financial break-even points. Lo4 how the degree of operating leverage can affect the cash flows of a project. Answers to concepts review and critical thinking questions. 9. (lo1) forecasting risk is the risk that a poor decision is made because of errors in projected cash flows. The danger is greatest with a new product because the cash flows are probably harder to predict. (lo2) with a sensitivity analysis, one variable is examined over a broad range of values. With a scenario analysis, all variables are examined for a limited range of values. (lo3) accounting break-even is unaffected (taxes are zero at that point). Cash break-even is lower (assuming a tax credit).

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