ACCOUNTING CORE 2 WEEK 6 MCQ's QUESTIONS AND CORRECT ANSWERS

Sensitivity analysis is an integral part of evaluating financial risk management policies. Which of the following statements best describes how this type of analysis is the most beneficial? a) Sensitivity analysis identifies the financial risks the organization should pay close attention to. b) Sensitivity analysis indicates how financial risks can be minimized. c) Sensitivity analysis quantifies the impact on financial results arising from erroneous critical assumptio d) Sensitivity analysis provides insight as to the likelihood that one or more critical assumptions will be Hide Feedback Answer c) is correct. Sensitivity analysis assesses the financial impact of erroneous assumptions. a b c d The net present values of two mutually exclusive investment proposals both exceed zero. Which of the following best describes the decision-making rationale of a company that is not under the constraint of capital rationing? ) Accept the proposal that has the greater IRR, because that proposal will result in a greater return. ) Accept the proposal that has the greater profitability index, because it will return the highest NPV per do ) Accept the proposal that has a shorter payback period, because the initial investment will be recovered m ) Accept the proposal that has the highest NPV, because the goal of the company is to maximize sharehold Hide Feedback Answer b) is correct. The profitability index compares the net present value of each alternative against the respective capital cost. This enables a company to identify which project is returning the highest NPV per dollar of investment.