FIN MISC Evaluating Project Economics and Capital Rationing

Learning Objectives 1. Explain and be able to demonstrate how variable costs and fixed costs affect the volatility of pretax operating cash flows and accounting operating profits. 2. Calculate and distinguish between the degree of pretax cash flow operating leverage and the degree of accounting operating leverage. 3. Define and calculate the pretax operating cash flow and accounting operating profit break-even points and the crossover levels of unit sales for a project. 4. Define sensitivity analysis, scenario analysis, and simulation analysis, and describe how they are used to evaluate the risks associated with a project. 5. Explain how the profitability index can be used to rank projects when a firm faces capital rationing, and describe limitations that apply to the profitability index.